[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                THE FINANCIAL COLLAPSE OF ENRON--Part 1
=======================================================================



                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                            FEBRUARY 5, 2002
                               __________

                           Serial No. 107-86
                               __________

       Printed for the use of the Committee on Energy and Commerce






 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma              DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina         CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
  Vice Chairman                      JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire         (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)









                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Powers, William C., Jr., Chairman, Special Investigative 
      Committee, Board of Directors, Enron Corporation...........    15

                                 (iii)

  






                THE FINANCIAL COLLAPSE OF ENRON--Part 1

                              ----------                              


                       TUESDAY, FEBRUARY 5, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, James C. Greenwood 
(chairman) presiding.
    Membes present: Representatives Greenwood, Stearns, Burr, 
Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak, DeGette, 
John, Rush, and Dingell (ex officio).
    Also present: Representatives Barton and Green.
    Staff present: Tom DiLenge, majority counsel; Mark 
Paoletta, majority counsel; Michael Geffroy, majority counsel; 
Jennifer Safavian, majority counsel; Casey Hemard, majority 
counsel; Brendan Williams, legislative clerk; William Carty, 
legislative clerk; Peter Kielty, legislative clerk; Chris 
Knauer, minority counsel; and John Cordone, minority counsel.
    Mr. Greenwood. This hearing of the Energy and Commerce 
Committee, the Subcommittee on Oversight and Investigations 
will come to order. The Chair recognizes himself for purposes 
of an opening statement.
    Today, we engage in the first part of a multi-day hearing 
into the financial collapse of the Enron Corporation. The 
principal focus of this stage of our investigation will be a 
series of transactions between Enron and several partnerships 
created and controlled by senior Enron officers and employees. 
By now, some key events that precipitated Enron's collapse have 
become familiar, though not yet fully understood by the public. 
These events serve as the point of entry into our hearing 
today.
    In October, Enron, which until recently was considered to 
be one of America's largest and most profitable corporations, 
announced an unexpected after-tax charge against earnings of 
more than $500 million and a reduction in shareholder equity of 
more than $1 billion. The losses stem from Enron's transactions 
with an entity about which we will hear a great deal over the 
next few days: LJM2. It was an entity whose named was formed 
using the initials of the spouse and children of its creator, 
Andy Fastow, who at that time was Enron's chief financial 
officer.
    The news of this financial bombshell and the curious role 
played by Enron's CFO in it prompted immediate concern in the 
market and in the media and resulted in the SEC opening an 
inquiry into the transactions involving LJM2. Enron's CFO was 
put on leave and subsequently fired, in Ken Lay's words, quote, 
``To restore investor confidence.''
    Already reeling from this management debacle and with its 
stock trading at sharply lower levels, Enron suffered an even 
greater embarrassment when in November of last year the 
corporation was obligated to restate its financial statements 
for the years 1997 through 1999. Now, instead of showing a 
strong balance sheet, the company was reporting multibillion 
dollar losses in earnings and in equity. The accounting 
practices, behind which these losses had until then been 
hidden, had also been used to mask huge losses in two other 
partnerships inspired by Mr. Fastow. These were the LJM Cayman 
partnership, also known as LJM1, and yet another related party 
entity, known as Chewco Investments.
    The second admission by Enron's corporate team effectively 
forfeited any remaining market for investor confidence in the 
company. Enron's stock took its final plummet, forcing yet more 
debts to come due. In a matter of weeks, a firm which had until 
only recently been hailed as a shining example of American 
enterprise was now forced to declare bankruptcy. An astounding 
$70 billion in market value evaporated seemingly overnight, 
bringing financial ruin to thousands of employees and 
investors.
    In recent weeks, committee investigators have sorted 
through Enron's wreckage, and in particular the Chewco, LJM1, 
LJM2 and associated deals, to learn what happened. We have 
discovered that while thousands of hardworking employees 
suffered terribly, there was a small group at the top who 
carted away millions from these very deals that ultimately led 
to Enron's collapse. And we have discovered a disturbing 
pattern of activity that directly contributed to the demise of 
this company: a web of apparent misrepresentations, half 
truths, deceit and self-dealing in which a significant number 
of company leaders became entangled.
    You will have an opportunity to hear explanations from some 
of those in positions of responsibility at the continuation of 
this hearing on Thursday, but today we will focus on the 
findings of Enron's Special Investigative Committee. The 
Special Investigative Committee was set up by Enron's Board of 
Directors to conduct an independent examination of the very 
transactions the committee is now investigating. Its 200-page 
report released over the weekend draws a very disturbing 
picture of Enron's activities which, sadly, appears to confirm 
our own findings to date.
    The report describes a series of highly questionable 
transactions that enriched a small number of corporate bigwigs 
at the expense of the company and of its shareholders. More 
disturbing still, it describes a complicated set of 
transactions by these individuals which were portrayed at the 
time as actions designed to guard against Enron's future 
losses. But its own true purpose was to hide large and 
increasingly unmanageable amounts of debt and liability.
    The report uses the word ``obtuse'' to describe investor 
disclosures that failed miserably to accurately convey the true 
financial state of the company or the risks attendant to the 
off-the-book dealings with various partnerships. It exposes a 
troubling lack of governance and management oversight and the 
failure on the part of outside advisors, the accountants and 
legal experts responsible for evaluating these transactions to 
make clear to investors what independent experts now 
comprehend. Enron's accounting tactics went well beyond the 
aggressive, apparently violating or circumventing several of 
the accounting professions most basic rules.
    Clearly, there is much troubling information in this report 
for us to consider as we move forward. Our sole witness today 
is William C. Powers, Dean of the University of Texas Law 
School. Dean Powers was appointed to Enron's Board of Directors 
just this past October to Chair this special committee. He has 
graciously accepted our invitation to testify as to the 
report's troubling findings. I am certain that Dean Powers' 
informed testimony will contribute to the factual backdrop for 
subsequent hearings with current and former Enron and Andersen 
officials. I thank him for his hard work in preparing this 
report in such an expedited time schedule and for his testimony 
today.
    The Chair recognizes the ranking member of this 
subcommittee, the gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman, and I want to thank 
you for holding this very important hearing, and I also want to 
thank our staffs, both the majority and minority, who are 
working very closely together. We actually know more than we 
knew last week when this subcommittee held the first hearing on 
the demise of Enron, and I am sure we will know more by the end 
of the week as well.
    This is some of the things that we are disclosing--or 
uncovering at this point in time. This is from Enron's 
documents that our staff uncovered, and it is a simplified 
diagram of 1 of the 4,000 partnerships. I mean a simplified 
diagram is almost comical to try to understand that one 
partnership.
    You know, I have had the opportunity to read through a 
large part of the report, as well as the summary, and obviously 
it is extensive. It is extensive in terms of understanding of 
what happened, but I am going to quote from something I read 
this morning that Arthur Levitt (ph) just wrote: ``Yet for all 
their excesses, analysts don't have a fiduciary duty to 
shareholders; board of directors do.'' Enron's board failed the 
smell test. Millions lost money and careers were destroyed 
while the company and its directors began to question mutual 
beneficial arrangements.
    The SEC and stock exchanges must now revisit the issue of 
board and audit committee responsibility. Consulting contracts 
for directors should be barred as well as seductions in the 
form of corporate jet usage and support for directors' favorite 
charities. Most important, at least half of every board must be 
independent by the most rigorous definition of the term.
    I think what we know at this point is that these 
partnerships were used as a deception for people to understand 
what the status of the company was. And what this report, Mr. 
Powers' report, does is lays out some of these interlocking 
relationships between management and people who got direct 
benefits by these partnerships. And one of the questions--and 
it is not just understanding Enron, but I think the issue for 
the committee and for the Congress and really beyond that, for 
the country as well, is, No. 1, are there other Enrons out 
there? Because if Enron and the people involved in Enron 
figured out the use of these partnerships as a way to 
effectively get millions, in fact, collectively, billions of 
dollars in personal theft, then the motivation is probably out 
there for other companies to be doing the same thing.
    But the system should not allow it. I mean I think what is 
clear from your report is that both management and the board of 
directors had to have been knowing what was going on. And, in 
fact, if officers claim they don't know the truth, they are not 
telling the truth. No one has ever accused these people of 
being stupid.
    Now, Business Week recently wrote, ``This is corruption on 
a massive scale. Tremendous harm has befallen innocent 
employees who have seen their retirement savings disappear as a 
few at the top cashed out. Terrible things have happened to the 
way business is conducted under the scope of deregulation. 
Serious damage has been done to ethical codes of conduct held 
by once trusted business professionals.''
    It is difficult not to contrast professionalism of modestly 
paid fire fighters and police doing their duty on September 11 
with the secretive and squirrely behavior of 6- and 7- figure 
accountants, lawyers, CEOs, bankers, financial analysts who 
failed at their duty with Enron. And, again, I emphasize their 
duty because the system is set up for this never to have 
happened in the first place.
    Mr. Chairman, after reading this report, I do not believe 
that Enron can emerge from bankruptcy until its entire top 
management has been removed. They all played a role in creating 
the environment that allowed this debacle, and they cannot be 
expected to now change their stripes.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the chairman of the full committee, the gentleman 
from Louisiana, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman, and my 
particularly thanks, first, to Mr. Dingell again for the 
extraordinary corroborative work that our investigative teams 
are doing in a bipartisan fashion on this issue, and to Dean 
Powers for taking on this awesome responsibility and for 
executing within the limits of his capabilities. We have noted 
very carefully you had not the power to subpoena or to compel 
testimony of witnesses or documents. You didn't have access to 
all the partnership papers, and you mentioned that your report 
is only as good as the information provided to you. But you 
have done an excellent job and your report tracks what our 
investigators on both sides of the aisle are finding in this 
case, and I want to thank you for that.
    But what you have basically found, and we will get into it 
a lot more tomorrow and Thursday, is an aberration, I hope, in 
American corporate history, an extraordinary aberration. But it 
is an old story. It is a story of insider theft, just using new 
wrapping and new forms and procedures to carry it out. It is a 
story, as you point out over and over again in your report, of 
the failure to follow accounting principles, to circumvent the 
accounting principles, to organize these structures improperly. 
Time after time you talk about the fact that had they followed 
the rules this wouldn't have happened, that Chewco was 
improperly constructed and JEDI failed for the same reason, and 
all of these structures that were created to put debt off the 
balance sheets ended up being shams at the end, because they 
didn't follow the integrity of the accounting principles that 
everyone else in the country, every other corporation in 
American tends to follow.
    I want to use the rest of my time in opening, Mr. Chairman, 
however, to speak directly to Mr. Ken Lay. Mr. Lay, wherever 
you are, I am sorry your attorneys were offended by anything 
Mr. Dorgan and I had to say on Meet the Press this weekend. I 
have got a little excuse for being tired. I got rear-ended by a 
drunk driver that night and then attended the Washington Mardi 
Gras until 2 a.m. in the morning before I read your report, Mr. 
Powers. But Mr. Dorgan was not tired, and neither he nor I 
misstated the facts.
    Your report, Mr. Powers, points to the high probability of 
security fraud at Enron. And your report lays the blame for 
what happened on a host of parties, and you didn't leave Mr. 
Lay out. You reminded him of his responsibility as the head of 
the organization, to be a better supervisor, to actually know 
what was going on if he didn't.
    And I am sorry if that offended your lawyers, Mr. Lay, but 
let me, please, ask you to consider for your own good, if when 
Sherron Watkins reported to you in August of 2001 in a lengthy 
meeting that Enron was about to implode in an accounting 
scandal, if Sherron Watkins was kind enough to tell you in that 
memo in 2001 in a private meeting with you, Mr. Lay, that your 
company had been robbing the bank and for the last 2 years was 
trying to pay it back, that is how bad things were, that is how 
big the cancer was eating away at the Enron Corporation, its 
employees and everyone who counted and trusted in it and 
invested in it, if that wasn't enough for your lawyers to be 
concerned about your testimony before a congressional 
committee, get yourself some new lawyers, sir.
    If when the SEC announced it was beginning an informal 
inquiry and then a formal inquiry into the operations of the 
security trading at Enron and the sham proceedings that went on 
there, if your lawyers weren't sufficiently concerned about 
your potential liability and involvement in this matter, get 
yourself some new lawyers, sir.
    If when the Justice Department announced that it was 
conducting a formal Justice inquiry into illegalities, 
potential illegalities at Enron and when the FBI arrived in 
Houston to look at your books and at Arthur Andersen books only 
to find out that Shredco had been hired by Enron to destroy 
documents and Enron's officials--Arthur Andersen officials, 
rather, had put out a retention and destruction policy that 
went right through the SEC subpoena, if that wasn't enough to 
warn you and your attorneys that there was real problems for 
all of you, get yourself some new attorneys.
    And if when Dean Powers, hired by Enron, by you and the 
Board of Directors at Enron to find out what went wrong and who 
wrote this report indicating that accounting principles were 
ignored, circumvented and violated right and left in all these 
dealings and the American public was told that you had a 
billion dollars of income you didn't have and debt was hidden 
from investors who should have known that the value at Enron 
wasn't there, if all of that wasn't enough for you to 
understand you had legal problems, and testifying in front of 
Congress was a risky business, then get yourself some new 
lawyers.
    And I have got a suggestion for you. Maybe your family is 
right, maybe you are broke, and maybe you can't afford to hire 
some lawyers, maybe you can sell a house in Aspen and buy 
yourself some new lawyers. But if that doesn't work, maybe you 
ought to get a hold of Mr. Fastow and Mr. Skilling and they can 
put together another little partnership for you and get some 
investors in and get yourself some lawyers, sir, because 
somebody is going to need some lawyers in this case, somebody 
needs them desperately. And it took Mr. Dorgan and I on Meet 
the Press to say the obvious, that the Powers report indicates 
the high probability of security fraud in this case, this awful 
aberration in corporate America, that accounting principles 
were flaunted, ignored and circumvented right and left to the 
detriment of every investor and every employee of this company, 
if it took that, if took Mr. Dorgan and I saying that on 
television for you to understand that you were at some risk 
coming to testify in Congress without the benefit of legal 
counsel or perhaps even the Fifth Amendment, then get yourself 
some new lawyers, sir.
    Mr. Powers, thank you for your contribution. As you point 
out, this is just the beginning. Your report would change 
dramatically if you had all the facts. We have got the 
advantage of subpoena power, we have got the advantage of 
compelling the production of documents, those that haven't been 
destroyed, and we are going to find out who owns those 
partnerships and those special entities, and we are going to 
find out what happened, because we have some powers working 
with the FBI and the SEC that perhaps you didn't have. But you 
did a heck of a job for us already, and we thank you for it. 
Thank you.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for an opening statement the ranking member of the 
full committee, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, thank you for the courtesy. I 
commend you again for this hearing, and it is my hope that this 
hearing will lead to a complete inquiry into the matters that 
are now before us, including legislative and administrative 
changes that need to be made in the process.
    I wish to begin by thanking you, Mr. Powers, and your 
counsel for presenting a very useful report on the related 
party transactions and other matters. You have done a fine job. 
I am troubled that some of those who were involved refuse to 
cooperate. I believe that raises questions into which the 
committee must go. I am also concerned about the limitations 
raised by the participation of Mr. Herbert Winokur, a long-time 
director. I will note the report is a devastating document. It 
outlines an extraordinary web of corporate chicanery and 
deceit. It provides a very useful starting point for this 
committee and a significant road map for this committee's 
efforts to unravel this sorry mess.
    I will observe that it reminds me of what used to be said 
by one of baseball's greats, ``This is deja vu all over 
again.'' It brings me back to the days of Mr. Sam Insel and 
also, perhaps, to Mr. Ponzi and other people of this kind. For 
those who don't remember Mr. Insel, and I have only vague 
remembrance of him, he was a fellow who built enormous 
pyramids, which he built and milked for the benefit of himself 
and his friends. It led to significant changes in the law, 
including the creation of the SEC, the passage of the different 
securities laws, the Public Utility Holding Company Act and a 
wide array of other statutory changes to protect investors, 
consumers, employees and pensioners. And it looks like 
something of that kind has to be done again to address the 
efforts of those who have brought Enron, its investors, its 
employees, and its pensioners to such a sorry state today.
    Your report, in often numbing detail, describes some of the 
financial sleights of hand that Enron executives used to hide 
the result of either stunningly inept business decisions or 
outrageously corrupt behavior by themselves and their friends. 
It also describes the disgusting self-enrichment by senior 
executives who sold out their fiduciary duties to the 
shareholders. And, it describes an extraordinary laxity, if not 
worse, of those responsible for keeping such behavior in check.
    One must ask, how were senior Enron executives able to use 
the company as their personal financial plaything? First, 
because of a massive failure of corporate governance. Was the 
highly paid board of directors simply asleep, or was it 
corrupt, or was it both? Second, because of an extraordinary 
failure by accounting and legal professionals to provide 
objective, independent, and forceful advice. Why were they 
acting like trained seals to the management? Again, were they 
incompetent, were they corrupt? We hope that this proceeding 
and others will lead us to some intelligent answers. Third, 
because of a massive failure by so-called experts in the credit 
rating agencies, the investment banks and the brokerage houses. 
Why didn't they ask tough questions?
    What we learn today will set the stage for a much more 
extensive inquiry into these matters. For example, we will also 
need to learn much more about whether weakness in government 
regulation of markets for financial instruments and vital 
commodities may have allowed this rascality to flourish. And we 
will need to reexamine the special protections that the 
Congress provided accountants in the Private Securities 
Litigation Reform Act of 1995, which came forth from this 
committee with the enthusiastic support of some of the people 
who are still on the committee. I am sure that they will enjoy 
explaining their support of that proposal and also their 
support of proposals which have constrained the SEC in its 
efforts to lead to a more vigorous, truthful, effective, and 
pro-public accounting industry.
    In any event, Mr. Powers, we are grateful to you for a very 
useful report, and for your appearance here today. Mr. 
Chairman, I thank you.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from North Carolina, Mr. Burr, for an 
opening statement.
    Mr. Burr. Thank the chairman. Dean Powers, welcome.
    Mr. Powers. Thank you.
    Mr. Burr. This almost makes law school seem fun, doesn't 
it? Clearly, you have gone through some tough changes since 
October; so have the employees of Enron and the confidence of 
the investor in America. Let me commend you for the work of 
your committee.
    I think there were many that thought that reports that came 
out on Enron's downfall might have a lot to do about the 
definition of shredding or the definition of revenues or debt. 
And in fact what you found in your investigation, the only 3 
months it took, was more than, in fact, the auditors found in 4 
years. It took them 4 years to make some of the changes that 
you identified in 3 months. It took the Enron management 4 
years to fess up to real revenue and debt numbers that you 
found accurately in a three-money period. These revisions 
contributed greatly to the lack of confidence that the 
investors had in Enron as a company.
    I am convinced that there was one thing that you did 
uncover: That at Enron there was a two-headed coin. On both 
sides of that coin was Mr. Fastow. No matter how you flipped it 
he always won. He won because of his presence at Enron, he won 
because of his presence at the partnerships that were created, 
and Mr. Fastow apparently looked after one person, that person 
who was on both sides of that coin. He profited when everybody 
else lost. Mr. Kopper profited when everybody else lost. A 
select few profited when everybody lost.
    I am confident that this committee and this Congress will 
not quit until we get all the facts. I am confident that the 
law enforcement that is appropriate will not quit until they 
find the guilty parties. I am confident that it is not going to 
be fun to be a board member at Enron during that period. But I 
want to thank you for your willingness to go through the 
process that you have just gone through and to encourage you to 
be diligent as we complete this process, however long it takes. 
Thank you, Dean Powers.
    Mr. Powers. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman, Mr. Stupak, for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman. Mr. Chairman, 2 weeks 
ago, we heard from Arthur Andersen and their role about 
shredding documents associated with the collapse of Enron. 
Today, we hear from Mr. Powers about many of the questionable 
and oftentimes repulsive financial dealings that occurred 
within Enron leading up to their bankruptcy. Mr. Chairman, we 
have learned through the media that even Enron has shredded 
documents. I hope that this committee will have a hearing on 
Enron's shredding of documents, what documents were shredded?
    We have only focused on Enron's role here in the United 
States but what about Enron's worldwide holdings, corporations, 
limited partnerships overseas? Who got bilked overseas, who 
cooked the books overseas? I hope this committee will explore 
these rooms in Enron's house of cards through the committee's 
jurisdiction under the Foreign Corrupt Practices Act. We 
certainly must review these aspects on Enron's dealings, not 
only here in the U.S. but also overseas.
    I appreciate the fact that Mr. Powers has the gumption to 
come here before our committee to tell us what he and his 
colleagues found in their review of Enron's accounting schemes. 
It is no wonder they had so many schemes when we have learned 
they have had close to 1,000 accountants working at Enron. 
While I believe that Mr. Powers had the best intentions in 
providing the Enron Board with a comprehensive picture of 
Enron's business practices over the last 5 years, I am troubled 
by the fact that the report does not include full disclosure, 
input from Mr. Fastow and Mr. Kopper, who had key roles in 
creating and managing the special-purpose entities of LJM and 
Chewco, which contributed to massive misstatements of Enron's 
financial security. The report focuses on only a few of these 
special-purpose entities, and I have been told that Enron has 
had literally thousands of them.
    The Powers report, even without full cooperation of many of 
the key Enron employees and without the full cooperation of 
Andersen officials or Enron's outside auditors, provides us 
with an extremely disturbing tale of greedy executives, lax 
oversight by senior management and a board of directors, or 
maybe we should call them ``board of enablers'' who appear to 
have not taken their roles very seriously.
    The board of directors gave serious flexibility, serious, 
dangerous flexibility to Mr. Fastow, allowing him to establish 
the LJM and by not following up on the few strings that they 
attached to Mr. Fastow's deal. The report shows how they robbed 
Peter to pay Paul and in some cases, relating to asset 
transfers, then transferred back to Peter again. As I stated in 
the hearing we had with Andersen officials 2 weeks ago, I 
believe the Securities Litigation Reform Act of 1995, or the 
Securities Rip-off Act, as many of us refer to it, had 
significant impact on the way corporations approach their 
business deals.
    Prior to the so-called reform, companies would likely not 
have risked many of the transactions in these aggressive 
accounting techniques, because they knew there was a very good 
chance they would be held accountable. Now, however, 
corporations are willing to take additional risk in their 
business dealings, because the 1995 reform bill insulated them 
from legal actions by putting up so many roadblocks for 
shareholders and employees to take legal action against them.
    Mr. Chairman, I fear the Powers report, even with its very 
serious admonitions, only scratches the surface of what is a 
thick layer of deceit atop perhaps the worst case of corporate 
officer malfeasance in recent memory. In their wake lies 
thousands of Enron employees and retirees with shattered 
financial lives, while many of the corporate executives, many 
of whom who are still working at Enron, have lined their 
pockets. It will be difficult, if not impossible, for Enron to 
emerge as a credible company from bankruptcy without a 
comprehensive purging of Enron executives and board members who 
were at the helm during this debacle. They must be held 
accountable. I hope the investors in Enron will get themselves 
a new board of directors and a new senior management team.
    I look forward to having the opportunity to question Andrew 
Fastow, Michael Kopper, Richard Causey and others later this 
week with regard to the issues in the Powers report. I hope 
they will come before our committee on Thursday and be open, 
honest and as aggressive in answering our questions as they 
were in pursuing their own financial futures. I thank you, Mr. 
Chairman, and I thank our witness for being here today.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Kentucky, Mr. Whitfield, for an 
opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much. Mr. 
Powers, we appreciate you being here today. I don't think any 
of us would have very many compliments for the Board of Enron, 
but I think that they obviously were forced into a situation 
where they asked you to Chair a group that would do an 
investigation and come forth with findings.
    We understand, obviously, that you did not have any 
subpoena powers and that you were not able to go in as much 
detail as you would like to have done, but I think the thing 
that comes out of this investigation, as in your own words, it 
is appalling to think that Mr. Fastow walked away with $30 
million. In one instance, he put down $25,000 and less than 2 
months later walked away, or his family's foundation did, with 
$4.5 million. Mr. Kopper put down $5,800 or so and walked away 
with $1 million in 2 months. In order to try to meet the code 
of ethics of Enron, knowing full well that they did not comply 
with those codes, removed Mr. Kopper and put in his domestic 
partner in some of these transactions. So I think it is very 
clear that these people were not stunningly inept but they knew 
precisely what they were doing, and it is a pure example of 
corporate greed. And it is really sad because it has basically 
wiped out the pension funds of thousands of employees who were 
depending upon this upon their retirement.
    So I am delighted that you are here today, and I look 
forward to your testimony. I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentlelady from Colorado for an opening 
statement.
    Ms. DeGette. Thank you very much, Mr. Chairman, and I would 
ask unanimous consent to put my entire opening statement in the 
record.
    Mr. Greenwood. Without objection.
    Ms. DeGette. Thank you. When I read the report Mr. Powers 
and his colleagues put together this weekend, I was stunned 
both by the duplicitous nature of these deals, these limited 
partnerships, which were designed to mask losses and to 
accentuate profits. I was also stunned by the breathtaking 
oblivion, apparently, evidenced by the Enron Board of Directors 
when they looked at these. The report indicates that Mr. Fastow 
and also Jeffrey Skilling, who was Enron's former CEO and at 
times COO, misled the board of directors by not appropriately 
disclosing their ownership in special-purpose entities. In 
particular, today, I would like to discuss the gap between the 
level of ignorance displayed by the board and the basic 
fiduciary duties of any corporation.
    What jumped out at me when I was reading the Powers report 
was how little the board of directors seemed to know about the 
special entities transactions. We know now from the report, and 
we are all very grateful to Mr. Powers and a little amazed he 
was able to do what he was without subpoena power or any of the 
other powers, but nonetheless the board waived Enron conflict 
of interest rules for Mr. Fastow to allow him partial ownership 
and managerial duties in Chewco and LJM while still on the 
payroll of Enron as a senior executive. A provision of the 
waiver approval included a set of conditions that Mr. Fastow 
would be required to meet, but Mr. Skilling was supposed to 
oversee Mr. Fastow's activities--a little like the fox guarding 
the henhouse, I may add. The report contends, though, that the 
board had no knowledge of the inappropriate nature of certain 
related party transactions. It is hard for us to believe that 
today, in retrospect, but perhaps, Mr. Chairman, when the 
committee receives the information we will be able to get with 
our subpoena power, we will be able to add to this knowledge.
    All of us know that boards of directors of corporations are 
required to serve in a fiduciary capacity. They are entrusted 
with the responsibility of acting in the best interest of 
shareholders and their employees, and when you look at the 
minutes of the Enron board meetings, dating back to 1997, it 
appears that the board's knowledge of questionable transactions 
involving Chewco, LJM, Raptor and other special entities that 
are detailed in the Powers report as having substantial 
problems.
    Now, I was looking at the structures of a lot of these 
transactions, and it is pretty amazing to me that the board 
would actually approve these. Mr. Deutsch showed the simplified 
Whitewing transaction. Here is the Chewco transaction. And if 
you look at those, those transactions are both structured 
completely differently in ways which are designed, in my 
opinion and I think in probably Mr. Powers' opinion, to mask 
losses and to maximize profits. This is a diagram, it looks 
elegant in its simplicity compared to the other two, of the 
Rhythms transaction, which I am interested in because it 
involves--it is the first transaction, and it involves a 
Colorado-based company.
    What strikes me is all of these transactions were approved 
by the Enron Board, and I was trying to think about the 
investors who had Enron stock in their 401(k) programs and 
their other programs. And to think about an unsophisticated 
investor trying to review Enron's financial status and trying 
to understand these very complex leveraging transactions. It is 
clear to me that when you have a corporation as large as Enron 
and when you have transactions as complex as these, it is 
incumbent upon the board of directors to exercise their 
fiduciary duty and to review these transactions in depth, not 
to simply rubber stamp these things, and especially when 
corporate employees and officers have financial interest.
    This is what we need to learn as a committee, both today 
and as we go forward, what did the board know and was it simple 
negligence on a breathtaking level or was there much more 
there? And so I look forward to hearing Mr. Powers' testimony 
today. I promise, Mr. Powers, I will not ask you to analyze 
each of these transactions in depth for us at this hearing, we 
only have 5 minutes to question, but perhaps at a later date. 
Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognizes the gentleman from Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman, and welcome, Dean 
Powers. We appreciate your coming here to speak. I read your 
report yesterday, and I looked for the word ``criminal'' in the 
report, and obviously I would not find that, and I understand 
that. In fact, this committee here is not here to look for 
criminality but to investigate and let the Justice Department, 
and we are well aware of what our function is, is to highlight 
the problem.
    But I did look at some of your testimony yesterday, and it 
was reported in the Washington Post where you said, ``Dealing 
with the Raptor partnerships,'' this is what you said, ``Enron 
hid the problem and, `gave the false impression that Raptor had 
enough money to pay Enron what they owed,' '' Now, that is 
euphemistically for not only did they hide the fact but they 
didn't tell the truth. Obviously, you are dean of the law 
school there at the University of Texas, and you understand 
when they don't tell the truth that is lying. So the 
euphemistic statements you are using there are something I 
think the committee and the American public should realize that 
even within your report, while you are not using the word 
``criminal,'' you are indicating indirectly that these people 
were not telling the truth.
    When you have a report like this, which is based upon 
volunteers, it is not going to get to the substance of this 
case, and that is why this committee and the Banking Committee 
and the Senate committees are making the right decision to have 
these folks come forward and to speak the truth under oath. 
This whole Enron thing is much like a financial Hindinburgh 
(ph). It was a marvel in the eyes of Wall Street, yet 
ultimately went up in flames, with employees and investors 
getting burned. And I think it is also apparent that this staff 
on this committee has done an excellent job in trying to 
extricate the facts here, and I think your report, Dean Powers, 
is helping also.
    But reading through your report, I also had the feeling of 
the would have, could have, should have type of philosophy. 
When you have people who are volunteering to give information 
they are going to present, which is basically people not 
telling the truth, self-enrichment, failures at many level, 
they are going to give a picture which is not totally accurate. 
So as much as your report is helpful, it is really just very, 
very first step here.
    You mentioned that there is failures of many levels and 
many people. I am not sure that it was a conspiracy that 
involved people right down to the middle or lower management. I 
think, based upon what we heard earlier in hearings on this 
committee and oversight, there were some people at the very top 
steering this whole basic series of misstatements and actually 
in violation of Enron's own code of conduct. You point out in 
the report that the Enron chief accounting officer failed to 
provide complete information to the Audit Committee, Enron's 
senior risk officers failed to adequately scrutinize these 
transactions for economic risk, and the board of directors, the 
board of directors failed to provide adequate oversight, and 
yet they were making large sums of money, and they had a 
fiduciary responsibility to make sure that they had proper 
oversight, and, last, of course, Arthur Andersen failed to 
provide objective accounting judgment. So this is a flawed, 
flawed company.
    I am concerned that because the Special Investigative 
Committee lacked the power to compel parties, Dean Powers, that 
some of this information, while very good, is not necessarily 
going to be as relevant as it should, but I do commend for your 
honest effort here, and I appreciate, again, you coming here 
this morning. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for an opening statement the gentleman from 
Louisiana, Mr. John.
    Mr. John. Thank you, Mr. Chairman, and also thank you for 
convening this hearing into the findings of the SIC, the 
Special Investigative Committee.
    I believe before this committee or any other person 
prejudges what went wrong at Enron, who is to blame and what 
Congress can do about it, I think common sense dictates that we 
closely review all of the available facts. The report produced 
here today by Mr. Powers is an important piece of the puzzle 
that our constituents, Americans and certainly former Enron 
employees are demanding that we solve. I think it is very 
apparent and clear from the report that, at a minimum, a 
systematic failure of checks and balances within Enron and 
between the company and its outside advisors allowed certain of 
its current and former employees and officers to engage in 
related party transactions that put self-enrichment before the 
interests of the company and its shareholders. It seems 
unimaginable to me that and many Americans and anyone who is 
following what has gone on that so many people involved, from 
the directors, senior management, auditors and lawyers, could 
have been completely unaware of what was happening and that the 
blame rests with only a few bad actors.
    Beginning with the formation of Chewco, Enron became a 
Ponzi scheme of self-dealing partnerships which were designed, 
in your own words, to mislead investors about the true 
financial state of the company and ultimatly resulted in its 
financial implosion. Mr. Chairman, the investigative report 
clearly shows that there was not simply a worm in Enron's 
apple; it was instead rotten to the core.
    The question for this committee is why thousands of 
employees and investors had to lose just about everything that 
they owned before anyone knew of this mess. Either the 
accounting system did not provide warnings of Enron's troubles 
or it was too easy to manipulate the rules to hide information 
from public scrutiny. Either way, I believe this report raises 
many more questions than it provides answers.
    Mr. Chairman, I look forward to working with you to find 
out the answers of what has gone on here, and I thank Mr. 
Powers for his report; it was very enlightening.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman, and thank you, Mr. 
Powers for being here today, and I will be brief so you can get 
on with your testimony.
    To say that your report is troubling would probably be the 
understatement of the century, and, as you know, market 
confidence is based on expectations of firm accounting 
principles and honorable corporate governance, both of which 
obviously have not occurred in this particular situation. Legal 
and management structure of entities like Enron, accounting 
entries, accounting restatements and so on, really need to 
become know to this committee. It is part of a fact-finding 
nature of what we are attempting to do. But I also believe that 
we need to, as quickly as possible, develop the facts, find out 
what went wrong, find out who is to blame, but what is more 
important about this subcommittee's and full committee's 
challenge is to come up with policy recommendations for changes 
to make sure that, first of all, this sort of thing isn't going 
on as we speak still, and, second, that we can take action 
legislatively if necessary to make sure that the public is 
protected and the capital markets' confidence is regained so 
that we can move forward in 2001 and 2002 with more confidence.
    So I appreciate your taking the time, which will be quite a 
lot of time, to be here today. I appreciate the efforts that 
you have undertaken as a member of the Board of Directors of 
Enron to produce this report, which is long and thorough. We 
will get to the bottom of this, and hopefully we will move 
forward with something that will be productive in the very near 
future. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman, Mr. Rush.
    Mr. Rush. Thank you, Dean Powers, for your attendance here 
and for your report, and I want to thank you, Mr. Chairman, for 
holding this hearing on the findings of the so-called Enron 
Powers Report, or in Superbowl terminology, the Enron play-by-
play book.
    Mr. Chairman, I, like most observers of the Enron collapse, 
was appalled to hear that thousands of Enron employees whose 
savings disappeared while top Enron executives cashed in their 
stock for millions with the release of the Powers report that 
shock has turned to utter outrage and disbelief. This report is 
a crucial piece to the puzzle of Enron in that it reveals a 
culture where every self-imposed standard enacted by Enron was 
broken. All of this was simply done in an attempt to satisfy a 
gluttonous appetite for corporate wealth.
    In particular, I commend the Powers Committee for its 
unflinching criticism of Kopper and Fastow who created a 
profiteering network of friends and associates designed to 
bleed Enron at the expense of its investors. And while I 
believe that this criticism is well-deserved, I am also 
interested in the degree to which the board of directors have 
escaped close scrutiny and criticism.
    In raising this issue, I do not question the integrity of 
Mr. Powers, who I know is a well-respected legal scholar. What 
I do question is the betrayal of Ken Lay who holds a Ph.D in 
economics as a naive and absent-minded professor who simply 
goofed by not spotting all of the evil-doings going on all 
around him. In the case of LJM transaction, I question the 
casting of the board of directors as a group of well-meaning 
and trustworthy corporate Governors who, despite their 
negligence, were unwitting victims of Andy Fastow and Michael 
Robert Kopper.
    That said, I await the various detailed responses that this 
report will certainly bring about from Arthur Andersen and 
others. I also await testimony from those parties who refuse to 
participate in this study, and with those responses I am 
certain that a more full and accurate picture of who knew what 
and when will emerge.
    Mr. Chairman, at the end of the day, I suspect that Mr. Lay 
and the rest of the Enron board will not be viewed as a hapless 
bunch of know-nothings, but rather as a group of well-educated, 
well-seasoned and shrewd business people who intentionally 
blinded themselves to a situation which reeks so badly that it 
couldn't help but be detected by even the most novice of 
business student.
    Whether Enron was a ship of pirates, a ship of fools or a 
combination of the two, it is my hope that today's hearing 
takes us a step closer to enacting bold, new legislation. 
Indeed, that legislation should ensure that no ship which is 
destined to sink with the life savings of thousands of innocent 
investors ever, ever, ever sets sail again in this nation. 
Thank you, and I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman, and the 
Chair thanks Mr. Powers for your forbearance this morning. Mr. 
Powers, you are aware that the committee is holding an 
investigative hearing and when doing so has had the practice of 
taking testimony under oath. Do you have any objection to 
testifying under oath?
    Mr. Powers. None whatsoever.
    Mr. Greenwood. Appreciate that. The Chair then advises you 
that under the rules of the House and the rules of the 
committee you are entitled to be advised by counsel. Do you 
desire to be advised by counsel during your testimony today?
    Mr. Powers. No, I don't.
    Mr. Greenwood. Okay. In that case, if you would please rise 
and raise your right hand, I will swear you in.
    [Witness sworn.]
    Mr. Greenwood. Appreciate that. You are now under oath, and 
you may give a 5-minute summary of your written statement. We 
thank you.

 STATEMENT OF WILLIAM C. POWERS, JR., CHAIRMAN OF THE SPECIAL 
  INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF ENRON 
                          CORPORATION

    Mr. Powers. Thank you, Mr. Chairman. Mr. Chairman, 
distinguished members of the subcommittee, my name is William 
Powers, and I am the dean of the University of Texas Law 
School. As you know, for the last 3 months, I have served as 
the chairman of the Special Investigative Committee of the 
Board of Directors of Enron, and I very much appreciate the 
opportunity to come here today and testify.
    During October of last year, questions were raised about 
Enron's transactions with partnerships that were controlled by 
its chief financial officer, Andrew Fastow. In the middle of 
October, Enron announced that it was taking an after-tax charge 
of more than $500 million against earnings because of 
transactions with one of those partnerships. Enron also 
announced a reduction in shareholder equity of more than a 
billion dollars.
    At the end of October, the Enron board established a 
special committee to investigate these matters. It then asked 
me if I would join the board for the purpose of chairing that 
committee and conducting that investigation. With the help of 
counsel and professional accounting advisors, we have spent the 
last 3 months doing that, conducting the investigation we were 
charged to conduct.
    Our committee's report was filed on Saturday. It covers a 
lot of ground and I hope it will be a helpful starting point 
for the necessary further investigations by congressional 
committees, by the Securities and Exchange Commission and by 
the Department of Justice. As several members of the 
subcommittee have noted in their statements, we see this report 
as just a start, merely a beginning. A copy of the executive 
summary of our report is attached to my statement here.
    Many questions currently part of the public discussion, 
such as questions dealing with the employees' retirement 
savings--and let me add, matters dealing with the employees' 
retirement savings and their loss of their savings nest egg is 
one of the most tragic aspects of this story--that is an 
important issue that requires much investigation. Also public 
questions about sales and trading in securities of Enron by 
Enron insiders, those also are important public questions. 
There were, however, questions beyond the scope of the charge 
we were given, and they are questions beyond what we could do 
in a 3-month period. Again, these are matters of vital 
importance, but they were not matters we addressed in our 
report, and they need further study by relevant congressional 
committees, the Department of Justice and other agencies.
    What we were charged with was investigating transactions 
between Enron and partnerships controlled by its chief 
financial officer, or people who worked in his department. That 
is what our report discusses. And, frankly, Mr. Chairman, as I 
said before, what we found was appalling.
    First, we found that Fastow, and other Enron employees 
involved in these partnerships, enriched themselves, in the 
aggregate, by tens of millions of dollars that they should have 
never received. Fastow got at least $30 million, Kopper at 
least $10 million, two others $1 million each, and still two 
more in amounts that we believe were in the range of hundreds 
of thousands of dollars. So there was self-enrichment.
    Second, we found transactions that were improperly 
structured. But if they had been structured correctly, Enron 
could have kept assets, under accounting rules, especially 
debt, off of its balance sheet. But Enron did not follow those 
accounting rules.
    Finally, we found something more troubling than individual 
instances of misconduct or a failure to follow accounting 
rules. We found a systematic and pervasive attempt by Enron's 
management to misrepresent the Company's financial condition. 
Enron management used these partnerships to enter into 
transactions that it could not, or would not, have done with 
unrelated commercial entities. Many of the most significant 
transactions apparently were not designed to achieve bona fide 
economic objectives.
    As our report demonstrates, these transactions were 
extremely complex. And I won't try to describe them in detail 
here, but I do think it would be useful if I could give just 
one example. It involves efforts by Enron to hedge against 
losses on investments that Enron had.
    Enron is not just a pipeline and energy trading company. It 
also had large investments in other businesses, some of which 
had appreciated substantially in value. These were volatile 
investments, and Enron was concerned because it had recognized 
the gains when these investments appreciated, and it didn't 
want to recognize the losses if the investments declined. 
Therefore, Enron purported to enter into certain hedging 
transactions in order to avoid recognizing losses from the 
investments. The problem was that the hedges weren't real. The 
idea of a hedge is normally to contract with a creditworthy 
outside party that is prepared, for a price, to take on the 
economic risk of an investment. If the value of the investment 
goes down, that other party will bear the loss, but that is not 
what happened here. If you cut through the complexity of these 
partnerships and transactions, here Enron was essentially 
hedging with itself.
    The outside parties with which Enron hedged were the so-
called Raptors. The purported outside investor in them was a 
Fastow partnership. In reality, these were entities in which 
only Enron had a real economic stake, and whose main assets 
were Enron's own stock. The notes of Enron's corporate 
secretary, preparing for the minutes from a meeting of the 
Financial Committee of the board, a meeting that was regarding 
these Raptors, captures the reality of these transactions. 
Those notes say, quote, ``Does not transfer economic risk but 
transfers P+L volatility.''
    If the value of Enron's investments fell at the same time 
that the value of Enron stock fell, the Raptors would be unable 
to meet their obligations, and the hedges would fail. This is 
precisely what happened in late 2000 and early 2001 when two of 
these Raptor vehicles lacked the ability to pay Enron on the 
hedges. Even if the hedges had not failed, though, in the sense 
I just described, the Raptors still would have paying Enron 
with the stock that Enron had provided in the first place; that 
is, Enron would simply be paying itself back.
    By March 2001, it appeared that Enron would be required to 
take a charge against earnings of more than $500 million to 
reflect the inability of the Raptors to pay. But then rather 
than take that loss, Enron compounded the problem by making 
even more of its own stock available to the Raptors--$800 
million worth. It gave the false impression that the Raptors 
had enough money to pay Enron on the money it owed, on the 
money that the Raptors owed. This transaction was apparently 
hidden from the board, and it certainly was hidden from the 
public.
    Let me say that while there are questions about who 
understood what concerning these many very complex 
transactions, there is no question that virtually everyone 
knew, everyone from the board of directors on down, everyone 
understood that the company was seeking to offset its 
investment losses with its own stock. That is not the way it is 
supposed to work. Real earnings are supposed to be compared to 
real losses. As a result of these transactions, Enron 
improperly inflated its reported earnings for a 15-month 
period, from the third quarter of 2000 through the third 
quarter of 2001. It overstated its earnings or inflated its 
reported earnings by more than $1 billion. This means that more 
than 70 percent of Enron's reported earnings for this period 
were not real.
    Now, how could that have happened? The tragic consequences 
of the related-party transactions and accounting errors were 
the result of failures at many levels, by many people: a flawed 
idea, self-enrichment by employees, inadequately designed 
controls, poor implementation, inattentive oversight, simple, 
and not-so-simple, accounting mistakes, and overreaching 
culture that appears to have encouraged pushing the limits.
    Whenever this many things go wrong, it is not just the act 
of one or two people. There was misconduct, to be sure, by 
Fastow and other senior employees of Enron, there were failures 
in the performance of Enron's outside advisors, and there was a 
fundamental default in leadership and management. Leadership 
and management begin at the top, with the CEO, Ken Lay. In this 
company, leadership and management depended as well on the 
chief operating officer, Jeff Skilling. And the board of 
directors failed in its duty to provide leadership and 
oversight of the company.
    In the end, this is a tragedy that could and should have 
been avoided. I hope that our report is a first step. It will 
take from the committee and other agencies, but I do hope that 
our report and the work of this committee will help reduce the 
danger that this tragedy will happen again to some other 
company. Thank you, Mr. Chairman.
    [The prepared statement of William C. Powers, Jr. follows:]
 Prepared Statement of William C. Powers, Jr., Chairman of the Special 
 Investigative Committee of the Board of Directors of Enron Corporation
    Mr. Chairman and distinguished Members of the Committee. My name is 
William Powers. I am the Dean of the University of Texas Law School. 
For the past three months, I have served as Chairman of the Special 
Investigative Committee of the Board of Directors of Enron Corporation. 
I appreciate the opportunity to come and testify before you today.
    As you know, during October of last year, questions were being 
raised about Enron's transactions with partnerships that were 
controlled by its Chief Financial Officer, Andrew Fastow. In the middle 
of October, Enron announced that it was taking an after-tax charge of 
more than $500 million against its earnings, because of transactions 
with one of those partnerships. Enron also announced a reduction in 
shareholder equity of more than a billion dollars. At the end of 
October, the Enron Board established a Special Committee to investigate 
these matters, and then asked me if I would join the Board for the 
purpose of chairing that Committee, and conducting that investigation. 
With the help of counsel and professional accounting advisors, we have 
spent the last three months conducting that investigation.
    Our Committee's Report was filed on Saturday. It covers a lot of 
ground and will, I hope, be a helpful starting point for the necessary 
further investigations by Congressional Committees, by the Securities 
and Exchange Commission, and by the Department of Justice. A copy of 
the Executive Summary of our Report is attached to my Statement here.
    Many questions currently part of public discussion--such as 
questions relating to the employees' retirement savings and sales of 
Enron securities by insiders--are beyond the scope of the charge we 
were given. These are matters of vital importance, but they are not 
matters we addressed in our Report.
    We were charged with investigating transactions between Enron and 
partnerships controlled by its Chief Financial Officer, or people who 
worked in his department. That is what our Report discusses. What we 
found was appalling.
    First, we found that Fastow--and other Enron employees involved in 
these partnerships--enriched themselves, in the aggregate, by tens of 
millions of dollars they should never have received. Fastow got at 
least $30 million, Michael Kopper at least $10 million, two others $1 
million each, and still two more amounts we believe were at least in 
the hundreds of thousands of dollars.
    Second, we found that some transactions were improperly structured. 
If they had been structured correctly, Enron could have kept assets and 
liabilities (especially debt) off of its balance sheet. But Enron did 
not follow the accounting rules.
    Finally, we found something more troubling than those individual 
instances of misconduct and failure to follow accounting rules. We 
found a systematic and pervasive attempt by Enron's Management to 
misrepresent the Company's financial condition. Enron Management used 
these partnerships to enter into transactions that it could not, or 
would not, do with unrelated commercial entities. Many of the most 
significant transactions apparently were not designed to achieve bona 
fide economic objectives.
    As our Report demonstrates, these transactions were extremely 
complex. I won't try to describe them in detail here. But I do think it 
would be useful to give just one example. It involves efforts by Enron 
to ``hedge'' against losses on investments it had made.
    Enron was not just a pipeline and energy trading company. It also 
had large investments in other businesses, some of which had 
appreciated substantially in value. These were volatile investments, 
and Enron was concerned because it had recognized the gains when these 
investments appreciated, and it didn't want to recognize the losses if 
the investments declined in value.
    Therefore, Enron purported to enter into certain ``hedging'' 
transactions in order to avoid recognizing losses from its investments. 
The problem was that the hedges weren't real. The idea of a hedge is 
normally to contract with a credit-worthy outside party that is 
prepared--for a price--to take on the economic risk of an investment. 
If the value of the investment goes down, that outside party will bear 
the loss. That is not what happened here; here, Enron was essentially 
hedging with itself.
    The outside parties with which Enron ``hedged'' were the so-called 
``Raptors.'' The purported outside investor in them was a Fastow 
partnership. In reality, these were entities in which only Enron had a 
real economic stake, and whose main assets were Enron's own stock. The 
notes of Enron's corporate secretary, from a meeting of the Finance 
Committee regarding the Raptors, capture the reality: ``Does not 
transfer economic risk but transfers P+L volatility.'''
    If the value of Enron's investments fell at the same time that the 
value of Enron stock fell, the Raptors would be unable to meet their 
obligations, and the ``hedges'' would fail. This is precisely what 
happened in late 2000 and early 2001 when two of these Raptor vehicles 
lacked the ability to pay Enron on the ``hedges.'' Even if the hedges 
had not failed in the sense I just described, the Raptors would have 
paid Enron with the stock that Enron had provided in the first place; 
Enron would simply have paid itself back.
    By March 2001, it appeared that Enron would be required to take a 
charge against earnings of more than $500 million to reflect the 
inability of the Raptors to pay. Rather than take that loss, Enron 
compounded the problem by making even more of its own stock available 
to the Raptors--$800 million worth. It gave the false impression that 
the Raptors had enough money to pay Enron what they owed. This 
transaction was apparently hidden from the Board, and was certainly 
hidden from the public.
    Let me say that while there are questions about who understood what 
concerning many of these very complex transactions, there's no question 
that virtually everyone, from the Board of Directors on down, 
understood that the company was seeking to offset its investment losses 
with its own stock. That is not the way it is supposed to work. Real 
earnings are supposed to be compared to real losses.
    As a result of these transactions, Enron improperly inflated its 
reported earnings for a 15-month period--from the third quarter of 2000 
through the third quarter of 2001--by more than $1 billion. This means 
that more than 70 percent of Enron's reported earnings for this period 
were not real.
    How could this have happened? The tragic consequences of the 
related-party transactions and accounting errors were the result of 
failures at many levels and by many people: a flawed idea, self-
enrichment by employees, inadequately-designed controls, poor 
implementation, inattentive oversight, simple (and not-so-simple) 
accounting mistakes, and overreaching in a culture that appears to have 
encouraged pushing the limits.
    Whenever this many things go wrong, it is not just the act of one 
or two people. There was misconduct by Fastow and other senior 
employees of Enron. There were failures in the performance of Enron's 
outside advisors. And there was a fundamental default of leadership and 
management. Leadership and management begin at the top, with the CEO, 
Ken Lay. In this company, leadership and management depended as well on 
the Chief Operating Officer, Jeff Skilling. The Board of Directors 
failed in its duty to provide leadership and oversight.
    In the end, this is a tragedy that could and should have been 
avoided. I hope that our Report, and the work of this Committee, will 
help reduce the danger that it will happen to some other company.

    Mr. Greenwood. Thank you, Dean Powers. We appreciate your 
testimony, and we know you testified just yesterday, and expect 
you will be testifying for days to come.
    The Chair recognizes himself for 5 minutes for purposes of 
inquiry. Chewbaca, JEDI Capital, Kinobi Holdings, Obi Wan 
Holdings, Enron executives seem to have had a fascination with 
Star Wars. My question, Dean Powers, is this: Is Ken Lay the 
Luke Skywalker of this of this tale or is he the Darth Vader?
    Mr. Powers. Well, he is not the Luke Skywalker. He 
certainly is responsible for allowing this to happen. I think 
there were red flags that certainly should have indicated to 
him that this was happening.
    Mr. Greenwood. Well, let me go right to your testimony. One 
of the things you just said was that, ``Virtually everyone from 
the board of directors on down understood that the company was 
seeking to offset its investment with its own stock. This is 
not the way it is supposed to be. Real earnings are supposed to 
be compared to real losses.'' So I take it from that you mean 
that Ken Lay knew that.
    And if you look at the law, the law is pretty clear about 
what is deceptive. It is deceptive to employ any device, scheme 
or artifice to defraud, to make any untrue statement or 
material fact or to admit to state a material fact necessary in 
order to make the statements made in the light of the 
circumstances under which they were made, et cetera. So connect 
the dots, it seems to me, that here was a company that in its 
financial statements was misleading and that everyone knew, 
including Ken Lay, that it was misleading its investors in its 
financial statements. So how do we get beyond the assumption, 
the conclusion, that Mr. Lay is guilty, as guilty as anyone 
else of intentionally defrauding his investors?
    Mr. Powers. Well, it is absolutely true that Mr. Lay fully 
understood that they were using their own stock to offset these 
losses in their other investments. And that is the problem.
    Mr. Greenwood. Not only that they were doing that, but they 
were not sharing that reality with their investors.
    Mr. Powers. Absolutely, that is correct. Well, can I just--
--
    Mr. Greenwood. You interviewed Mr. Lay. About how much time 
did you spend interviewing Mr. Lay?
    Mr. Powers. I think it was a couple of hours. Four hours.
    Mr. Greenwood. Four hours? Okay. And so on this direct line 
of questioning about what Mr. Lay understood and when he 
understood and, as Mr. Tauzin said, certainly we know in August 
he was advised of this, what was Mr. Lay's story about--how did 
he defend himself from this obvious line of questioning, which 
is did he in fact--was he complicit in intentionally defrauding 
his investors?
    Now, it seems to me when you look at motive, we sort of 
understand some of Mr. Fastow's motives, because there was 
self-dealing involved. Mr. Fastow seems to be the Betty Crocker 
of cookbooks. But Mr. Lay also had a motive, it would seem, for 
the investors not to understand that the stock was overvalued, 
and that is because he was a holder of millions of dollars of 
stock.
    Mr. Powers. Well, when we interviewed Mr. Lay, he certainly 
understood that as elaborate as these schemes were, ultimately 
they were using Enron stock to hedge against these investment 
losses. He understood that. I can tell you what his story was: 
He didn't understand or appreciate that there was anything 
wrong with that. I don't know whether that is credible; I am 
saying that was his story, that he didn't--the story was the 
accountants had signed off on it; he assumed it was an okay 
accounting device.
    Mr. Greenwood. Was it credible to you? Do you think it is 
credible?
    Mr. Powers. It is very hard--we did present him with 
documents and in a sense cross examine, but we did not have the 
devices available to us, and that is a reason why our report is 
a first start. It certainly is something that people would want 
to go into a great deal further. It raises questions, I agree.
    Mr. Greenwood. You repeatedly note in your report that 
Andersen, Enron's outside auditor and internal consultant on 
these transactions, refused to fully cooperate with your 
inquiry by making certain documents and persons available for 
your review. Can you be more specific about what Andersen 
provided you with and what they would not, both in terms of 
persons and documents?
    Mr. Powers. Okay. When we started the investigation, we 
started asking Andersen if we could see documents and 
interview--see their work papers and interview their 
accountant. We wanted to do that after we developed the basic 
understanding, but as we went forward with the investigation, 
they would say, ``Well, we will do that,'' but we never got to 
interview their accountant. We did see some of their work 
papers, we did not see the work papers for 2001, which are 
crucial; we did not see those. We did see some of the papers. 
We asked for copies. A few days later, Enron fired Andersen, 
and we were told that at that point Andersen would no longer 
cooperate. By that point, we had not been able to talk and get 
their explanations of these work papers. We have not been able 
to talk with their accountant.
    Mr. Greenwood. Thank you, Mr. Powers. The Chair recognizes 
the gentleman from Florida, Mr. Deutsch, for purposes of 
inquiry.
    Mr. Deutsch. Thank you, Mr. Chairman. One of the mandates 
of your committee was to recommend discipline at Enron. What 
discipline is the committee going to recommend?
    Mr. Powers. We did not recommend discipline in the end, and 
the reason was we have been going non-stop getting this done. 
My testimony had been requested, we wanted to get this report 
out, and thought that, frankly, being exhausted at the end of 
it, we didn't want make judgments about discipline. And I think 
the facts speak for themselves, and others are going to have to 
make those judgments. But we did not, in the end, recommend any 
discipline, but we did not mean to imply by that that there 
should not be discipline imposed here.
    Mr. Deutsch. Let me follow-up on some of the comments that 
the chairman was mentioning. If the company keeps billions of 
dollars of potential liability off of its balance sheets so 
that its shareholders and investors don't know about it, as 
Enron did, isn't that fraud?
    Mr. Powers. Well, there are legitimate accounting devices 
that--I am not an expert in the area of securities fraud--but 
that companies use to keep transactions and debt, using 
structured financing, off their balance sheets. And if they 
don't use the proper structures and don't reveal the proper 
structures, then there are serious questions about fraud.
    Mr. Deutsch. So, again, I mean what you are really saying 
is that as good the--you are really not an expert in securities 
fraud.
    Mr. Powers. That is correct, or enforcement of what 
penalties should be imposed here.
    Mr. Deutsch. Let me go directly to the Raptor transactions. 
You stated, and I am quoting, ``Virtually everyone from the 
board of directors on down understood the company was seeking 
to offset its investment loss with its own stock. That is not 
the way it is supposed to work,'' closed quote to your 
statement. If everyone understood that except the shareholders, 
and it is wrong, isn't it fraud on the shareholder?
    Mr. Powers. I don't feel I am in a position to, under the 
securities law, answer that question. The shareholders--there 
was not transparent disclosure of what was going on in these 
transactions with the shareholders, absolutely.
    Mr. Deutsch. Let me just stop. By any definition of common 
usage would you say it is fraud? Putting away your attorney's 
hat and a securities lawyer, which you are not, I mean I think 
that is in a sense what our job is, because that is clearly our 
intention in the statute, and fraud is fraud.
    Mr. Powers. Right.
    Mr. Deutsch. I mean if people don't understand it--your 
quote of not understanding it except for the shareholders, the 
whole purpose of the system is the shareholders are supposed to 
know what is going on.
    Mr. Powers. Absolutely. My only hesitation is fraud 
normally requires a certain state of mind, and I am not in a 
position to ascertain the state of mind of every one of these 
individuals. If there is a state of mind----
    Mr. Deutsch. And it doesn't necessarily require state of 
mind, because if you have an instance inferring to that, then 
you can infer the state of mind. You said that when an 
additional $800 million of stock was added to the Raptor 
accounts by Enron so it wouldn't have to show a loss, it was, 
quote, ``apparently hidden from the board,'' close quote. What 
do you mean? Did you interview all the board members to 
determine what they knew and what they didn't know?
    Mr. Powers. Yes. We interviewed--formally interviewed nine 
board members. That was a restructuring deal that--much else 
was known by the board, but that was a restructuring deal in 
early 2001 that there was agreement, as the evidence showed, 
that was not brought before the board.
    Mr. Deutsch. And can the company issue $800 million in 
stock without the approval of the board?
    Mr. Powers. They couldn't issue the stock. This was stock 
that was already owned by the company because of contracts it 
had with outside parties. And that avoided the necessity to 
actually issue new stock. They transferred stock the company 
owned to these structures, and I am sure that is why already-
owned stock was used.
    Mr. Deutsch. So, again, I mean clearly an intention to keep 
that information from the board itself?
    Mr. Powers. Absolutely. I have no doubt that that was 
intentional by the people that restructured--Fastow and others. 
It was intentionally keeping that from the board, and therefore 
keeping it from the public, absolutely.
    Mr. Deutsch. Let me ask one question, and, again, I didn't 
see it in the report, but it just is a disturbing issue, and, 
again, you mentioned the limitations specifically on the 401(k) 
issue. But as someone who has spent 3 months--the last 3 months 
looking at Enron, one of the real disturbing issues, not just 
the lock-out provision on Enron stock but the switching of the 
managers of the 401(k)s to basically have a 60-day additional 
lock-out, which, again, from an outside-looking-in perspective, 
I mean there is different levels of evil that have occurred in 
this process. I mean that is about at the highest level that I 
can think of. I mean have you looked at that decisionmaking 
process at all or you were just not able to look at that?
    Mr. Powers. We did not look at that. We did a great deal. 
We reviewed, I think, over 400,000 pages of documents, 
interviewed 60 people, and we did not look into the 401(k)s and 
the lockout.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the chairman, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. Dean Powers, when 
I was attending law school at LSU, it was apparent to me that 
Latin was going to be important to me, and in preparation for 
that, I took a non-credit Latin course. And the reason I did 
was because in the law we use Latin, because it is so precise. 
Terms like res judicata and res ipsa loquitur have special 
meanings in the law and jurisprudence. But I want to help get 
away from that, and I hope you will help me, as dean of law 
school, to put this in lay terms so we can understand it in a 
layman's sense.
    Basically, what you have presented to us is a report that 
details how these partnerships and the deals, some two dozen 
deals structured by either Chewco or LJM1 and 2--LJM1 and 2, by 
the way, I think were the initials of the wife and children of 
Mr. Andrew Fastow.
    Mr. Powers. That is correct.
    Chairman Tauzin. Structured by him. These deals structured 
by this partnership failed the basic test of structural 
compliance and operational compliance with current accounting 
principles; is that right?
    Mr. Powers. That is right, and their whole concept was 
flawed.
    Chairman Tauzin. Now, just for a second, let us think about 
what would be a legitimate function of a special-purpose 
entity, an SPE, or a partnership like LJM. Legitimately, Enron 
had some problems, it had some assets like Rhythms, which they 
put $10 million in and all of a sudden it was worth $500 
million because of inflation and the value of the stock market 
and the run-up of the stocks. Like many corporations holding a 
risky stock like that, they probably had a need to put that 
risk off, to share that risk with someone else if the stock 
fell dramatically so it didn't hurt their own stock. That is a 
legitimate function that corporations use special-purpose 
entities and they use partnerships in some cases to do. Isn't 
that premised upon the notion, however, that there is a real 
independent sharing of the risk, that the company really gives 
the risk over to someone else to either take, in whole or in 
part, in order to hedge potential loss to its own stockholders 
if a company like Rhythms suddenly lost its value, which it 
did, which it eventually did? Isn't that, in layman's terms, 
what occurs in these partnerships, in these SPEs?
    Mr. Powers. I can't add anything that would clarify it more 
than your statement; that is absolutely correct.
    Chairman Tauzin. Now, what you found and we have been 
finding is that, No. 1, in the case of Chewco, it was 
structured wrong. They didn't have enough outside investment to 
meet the standards of independence. And you also found some 
clear questions. We have found many, many clear questions of 
how independent these operations were. On Thursday, we will 
detail, for example, how these sweetheart deals were being 
struck between the partnerships and the corporation, how 
managers of the partnerships were actually threatening people 
at Enron with firing if they aggressively negotiated for Enron. 
They threatened others with loss of their bonuses. We had a 
weird situation where the bonus came from the partnership, and 
the salary came from Enron. Incredible conflicts of interest 
where employees were invited in to share in the profits of some 
of these outside ventures and profits guaranteed at 2,500 
percent in one case and where the risk to Enron and its 
shareholders was never really properly transferred. In fact, 
Enron continued to guarantee the losses to the partnerships. 
The only person protected was the manager of the partnerships. 
It was guaranteed they could take their money out, plus profit.
    So what we have at Enron, as I see from your report, and as 
we are beginning to see, is a failure of the independence of 
these organizations, or these deals, or these SPEs and the 
failure to properly shift the risk away from the corporation 
when a hedge fund was created or a put was attempted, if you 
will, on stock that was kind of risky, that they were concerned 
about, in a scheme that guaranteed money to the managers of the 
partnership but nevertheless left the stockholders of Enron 
completely at risk, all the while creating the impression that 
Enron was making money and was free of debt when the debt was 
still there.
    Now, if I were a corporation in America using one of these 
vehicles legitimately, then my company would be protected from 
that loss when it occurred; I would have shared that risk with 
the partnership, or the special-purpose entity, and my 
shareholders would have been the better off for it. But in the 
case of these entities that were created and these deals that 
were cut, where the risk did not transfer, can you give me any 
purpose for doing that, other than to hide debt from investors, 
other than possibly to enrich the managers of the business, the 
account that was doing it, or to create a false impression of 
income to the corporation? Can you give me any other reason to 
do it?
    Mr. Powers. I cannot, and I would just add that the 
statement that you just made, Congressman Tauzin, is exactly 
correct.
    Chairman Tauzin. So, Mr. Chairman, if I can, and I will 
conclude, what you are concluding is what I have concluded, 
that if your facts are correct, and if our investigation 
continues to bolster the evidence of the situation as I have 
just described it, there was no legitimate purpose in the 
construction of some of these deals, except the defrauding of 
investors who were putting their money into Enron, and in some 
cases, the defrauding of investors who were putting their money 
into these partnerships, because we have also found, by the 
way, that some banks were told they would get special bond 
deals if they would put the money up to fund the partnership.
    And I want to end it maybe with this and see if you agree 
with me. What we really have here, as I said earlier, is a case 
of inside theft. It is a deal where whoever managed the deal 
was using the credit of the corporation, which remained liable 
for the deal, to borrow money from other investors to the 
partnership so that they could take it and go home with it, 
while the corporation remained fully at risk, not only for the 
new loans but for all the risk of the stock, such as Rhythms, 
which might decline in value, and eventually collapse the 
corporation.
    Mr. Powers. These partnerships were definitely using 
Enron's assets and credit to then create partnerships that 
enriched themselves.
    Chairman Tauzin. And they were benefited two ways. One way, 
they got money out of it. Enron was borrowing money, in effect, 
that they took home. Enron had debt, but it was called income, 
miraculously, under these plans. And, second, because they kept 
the investing public and the employees of Enron who had their 
401(k) plans tied to the Enron stock, because they kept them in 
the dark as to what was going on, Enron stock kept inflating in 
value, because we all thought it had a billion dollars of 
income it didn't have, and it had a lot less debt than it had.
    So they benefited twice. Their stock values are going up. 
They can then sell, even though the employees couldn't sell it. 
And they were sucking money out of the partnerships that Enron 
was putting up the credit for. Now, how can anybody look at all 
that and conclude that the FBI doesn't need to be over there 
with the search warrant and a potential set of handcuffs is 
beyond me. If there isn't consumer fraud here, I don't know 
where we are going to find it. Thank you very much.
    Mr. Greenwood. The Chair thanks the chairman and recognizes 
the ranking member of the full committee, Mr. Dingell, for 
purposes of inquiry.
    Mr. Dingell. Mr. Chairman, Mr. Powers, I begin by 
complimenting you on a fine report. I have limited time so I 
have got to ask you questions in a way that you can respond 
pretty much with a yes or no, and I say that with apologies to 
you because of the respect I have for you.
    Now, I would like to go to Vincent & Elkins. Isn't it true 
that they helped to structure many of the deals that were the 
subject of your investigation?
    Mr. Powers. They did work on the deals. As I point out in 
the report, I disqualify myself from making judgments about 
those, but they did work on these deals.
    Mr. Dingell. Now, Vincent & Elkins concluded that they 
facts in its preliminary investigation revealed it did not 
warrant, and I now quote, ``further widespread investigation by 
an independent counsel or auditors.'' Is that right?
    Mr. Powers. I believe they did say that in their 
conclusion.
    Mr. Dingell. Now, if you were in Mr. Lay's position with 
Mr. Watkins' letter in your hand, would you have asked the law 
firm that represented your company in many of these 
transactions to review these same transactions?
    Mr. Powers. If I were in Mr. Lay's position, I would have 
asked for a much more extensive investigation.
    Mr. Dingell. And by somebody who was in fact independent as 
opposed to somebody who had been involved in the structuring of 
the deal; is that not so?
    Mr. Powers. If I had been Mr. Lay, I certainly would have 
considered that.
    Mr. Dingell. That would have been the proper way. Now, Mr. 
Jordan Mintz, then general counsel of Enron Global Finance, was 
so concerned about the LJM deals that he sought outside counsel 
to investigate the structure and the propriety of these 
transactions. Were you aware of that fact?
    Mr. Powers. Yes.
    Mr. Dingell. Did you know that Mr. Mintz went out of his 
way to hire a firm other than V&E because of the conflicts 
inherent in the firm's relationship with Enron?
    Mr. Powers. Yes. Mr. Mintz did use another firm.
    Mr. Dingell. Do you believe that V&E should have had the 
professional judgment to recuse itself from the investigation 
because of its role in structuring many of these controversial 
partnerships?
    Mr. Powers. Well, I disqualified myself from evaluating 
those, and I don't think I have enough information to make a 
judgment on that.
    Mr. Dingell. So it would not seem improper that they should 
have done the same thing.
    Mr. Powers. I would have to focus on those facts more than 
I have.
    Mr. Dingell. All right. Now, isn't it true that most of Ms. 
Watkins' concerns related to accounting issues?
    Mr. Powers. Yes.
    Mr. Dingell. Isn't it also true that V&E agreed with Enron 
management that it wouldn't examine accounting issues as a part 
of its investigation into the Watkins memo?
    Mr. Powers. I would have to go back and look at the letter, 
because, again, I haven't focused on that.
    Mr. Dingell. Factually, it would appear to be correct, 
however.
    Mr. Powers. I don't have any reason to disagree.
    Mr. Dingell. Does this instill in you great confidence in 
the V&E investigation?
    Mr. Powers. Again, I disqualified myself from making 
judgments on that, and so I am not informed enough about it.
    Mr. Dingell. Would I be unfair in assuming that they should 
have followed your wisdom in these matters?
    Mr. Powers. They weren't asked to do the kind of 
investigation that I was asked to do.
    Mr. Dingell. Now, how much V&E bill Enron for the 
investigation?
    Mr. Powers. I don't know.
    Mr. Dingell. Mr. Baxter committed suicide, as you well 
know, several weeks ago--a very tragic event. Did V&E ever 
interview Mr. Baxter as a part of its investigation into Ms. 
Watkins' allegations?
    Mr. Powers. I don't know whether they did or not.
    Mr. Dingell. Did your committee interview Mr. Baxter?
    Mr. Powers. Yes, we did.
    Mr. Dingell. Ms. Watkins alleged--I wonder why you would 
and they would not interview Mr. Baxter.
    Mr. Powers. Well, we conducted a very thorough 3-month 
investigation.
    Mr. Dingell. Are you telling me they did not?
    Mr. Powers. They didn't conduct a 3-month investigation, I 
don't think.
    Mr. Dingell. Now, Ms. Watkins alleged numerous accounting 
failures, but Enron and Vincent & Elkins agreed not to look at 
these transactions. How can we call this a complete report?
    Mr. Powers. Our report or----
    Mr. Dingell. No, the Vincent & Elkins report, which did not 
look at accounting failures and accounting matters?
    Mr. Powers. Again, I did not myself pursue what they looked 
into and what they didn't. Other people on the committee did.
    Mr. Dingell. Do you have any reason to believe that anyone 
at Enron took Ms. Watkins' allegations seriously?
    Mr. Powers. Well, they responded to some extent. The 
management at Enron didn't take it seriously enough.
    Mr. Dingell. It is also clear that people at Enron were 
told not to worry because Vincent & Elkins was reviewing them; 
isn't that right?
    Mr. Powers. I don't remember, but I have no reason to 
disagree with that.
    Mr. Dingell. Can you think of another reason why they might 
not have taken them seriously?
    Mr. Powers. I am sorry, why the management didn't take 
the----
    Mr. Dingell. Seriously Ms. Watkins' allegations.
    Mr. Powers. Well, they were very troubling allegations.
    Mr. Dingell. They were.
    Mr. Powers. Yes.
    Mr. Dingell. But were they taken seriously? Did you find 
any evidence in your inquiry that these allegations were taken 
seriously by Enron?
    Mr. Powers. I think they were not taken seriously enough, 
certainly.
    Mr. Dingell. Did you find any evidence that Vincent & 
Elkins went into these allegations?
    Mr. Powers. Again, I did not, myself, personally. The 
report deals with that. I disqualified myself from that, 
because Vincent & Elkins has done a tremendous amount of pro 
bono work for the law school and has been a supporter of the 
law school, and I thought it would be better for the report if 
I didn't participate in that.
    Mr. Dingell. Well, I applaud that, but I am just curious of 
did they--well, never mind. Mr. Chairman, I thank you for your 
kindness. Mr. Powers, I have asked you some rather not so nice 
questions, but you continue to enjoy my respect.
    Mr. Powers. Well, thank you very much.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from North Carolina, Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman. Dean Powers, you noted 
in your report that there were individuals that you did not 
have the opportunity to have Q&A with. Was that--that was 
requested of those individuals, they just denied to 
participate; is that correct?
    Mr. Powers. Yes, especially Fastow and other people in 
these partnerships. We tried to interview them and they 
declined.
    Mr. Burr. You also referred to a limited amount of Andersen 
documents. Did you make requests for documents from Andersen 
that they denied you access to those documents?
    Mr. Powers. We asked them for all of their work papers over 
this period of time.
    Mr. Burr. And did they produce all their work papers?
    Mr. Powers. They did not. They did not produce work papers 
over the period of 2000. We negotiated with them, it dragged 
on, and we did not get them.
    Mr. Greenwood. Will the gentleman yield just for 5 seconds. 
To put a point on Mr. Burr's question on interviewing Mr. 
Fastow, I believe, according to your report, you had a brief 
interview with Mr. Fastow.
    Mr. Powers. Yes, that is correct.
    Mr. Greenwood. Clarify that.
    Mr. Powers. At some point, Mr. Fastow's lawyer said that he 
would be interviewed, and I was not personally there, but I 
think it was an extremely short interview, because he simply 
wouldn't cooperate.
    Mr. Greenwood. How short?
    Mr. Powers. Well, I think the--it took an hour, but I don't 
think there were--very little information was forthcoming. Can 
I correct, the work papers that we didn't get were from 2001.
    Mr. Burr. And for the papers that you didn't get, did 
Andersen give you an explanation as to why they couldn't 
produce them or wouldn't produce them?
    Mr. Powers. It dragged out, and then finally we--the 
company discharged them, and they called us back and said, ``We 
won't cooperate any further.''
    Mr. Burr. So Andersen refused to cooperate.
    Mr. Powers. From that point on. That was in January.
    Mr. Burr. Dean, your committee, in 3 months, discovered a 
tremendous amount. They discovered some things that it took 
Andersen 4 years to correct or amend in financial statements. 
Based on the information you have, was Andersen misled by Enron 
management?
    Mr. Powers. I am not in a position to say that they were 
never misled by Enron management on any details. They certainly 
had a great deal of information about the structure of these 
transactions.
    Mr. Burr. Were they in collusion with Enron management?
    Mr. Powers. I don't think I have the information from our 
investigation to know that. They certainly were working 
contemporaneously on the accounting of these structures.
    Mr. Burr. Were they competent to handle the Enron audit?
    Mr. Powers. I think Arthur Andersen is a competent 
accounting firm.
    Mr. Burr. Let me ask you, Dean, going back to Mr. Dingell's 
questions, relative to V&E and specifically their 
investigation, and I understand where you are on it, but there 
is a news report that says that individuals from Enron limited 
greatly what they asked V&E to look at, that they didn't ask 
them to look at accounting structures; as a matter of fact, the 
told them not to. Is that your understanding of the 
instructions that were given by Enron management to V&E on that 
investigation?
    Mr. Powers. I think that is in our report, yes.
    Mr. Burr. And you also referred to others within the 
committee that looked at V&E, not you.
    Mr. Powers. Yes.
    Mr. Burr. Those others were on your special committee?
    Mr. Powers. Yes, that is correct, the other two members and 
counsel.
    Mr. Burr. And what they found, relative to V&E's 
participation, would be found in your report?
    Mr. Powers. Oh, yes, absolutely.
    Mr. Burr. In its entirety.
    Mr. Powers. And the committee investigated that and 
interviewed people. I just recused myself from it.
    Mr. Dingell. Mr. Chairman, would the gentleman yield, 
because he has raised a question, and I think it is valuable?
    Mr. Greenwood. Be happy to.
    Mr. Dingell. Here is reading from Vincent & Elkins' 
document entitled, ``Preliminary Investigation of Allegations 
of an Anonymous Employee.'' It says, as follows, in the second 
page: ``In preliminary discussions with you, it was decided 
that our initial approach would not involve second-guessing the 
accounting advice and treatment afforded by AA and that there 
would be no detailed analysis of each and every transaction and 
that there would be no full-scale, discovery-style inquiry.'' 
The letter is directed to Mr. James B. Derrick, Jr., and I 
believe it would useful, Mr. Chairman, it goes in the record at 
a suitable place. And I thank the gentleman for his patience.
    Mr. Greenwood. Without objection.
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    Mr. Burr. Reclaiming my time, Dean, it is my understanding 
that under Enron's code of conduct Mr. Fastow would have to 
have received the blessings of Mr. Lay, who was then CEO and 
chairman of the board, to participate in the partnerships. 
Certainly, their accounts might have been out of your report, 
but Mr. Lay said he was not asked and did not grant his 
blessings. Is that your understanding?
    Mr. Powers. My understanding is that he would have to get 
approval by the Office of the Chair.
    Mr. Burr. And----
    Mr. Powers. And that included----
    Mr. Burr. [continuing] Mr. Lay was the Chair.
    Mr. Powers. He was the Chair, but there were three people 
in what was called the Office of the Chair.
    Mr. Burr. Did you find any of those three that granted 
permission to Mr. Fastow?
    Mr. Powers. Even though the structure was to go to the 
Office of the Chair, they actually took that to the board on 
LJM1 and LJM2, and the board made the findings necessary to 
permit Mr. Fastow to participate in those partnerships.
    Mr. Burr. So the board of directors actually signed off on 
it.
    Mr. Powers. Yes.
    Mr. Burr. And did they also sign off on Mr. Kopper's 
involvement in partnerships?
    Mr. Powers. No.
    Mr. Burr. Was he not under the same code of conduct at 
Enron, that he would have had to have received the chairman, 
CEO or board's permission to participate in the partnerships.
    Mr. Powers. Yes, but he did that surreptitiously, I 
believe.
    Mr. Burr. So he got nobody's approval----
    Mr. Powers. Correct.
    Mr. Burr. [continuing] to participate in the partnerships.
    Mr. Powers. That is correct.
    Mr. Burr. How much did Andersen play in the actual 
structure of the partnerships?
    Mr. Powers. We don't know how much they actually--whether 
they designed them. They were contemporaneously to the 
development; that is, before, for example, Raptor was put in 
place. They were doing accounting work--it is hard for us to 
know exactly what they were doing. We have their bills, but 
whether it was actually designing, doing the accounting, 
approval work, but they were doing it contemporaneously to the 
design of these structures, not simply after they had been 
year-end and being audited.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Burr. I would ask unanimous consent for 1 additional 
minute.
    Mr. Greenwood. Without objection.
    Mr. Burr. I thank the Chair. Let me clear up one thing. 
Now, Mr. Kopper participated in partnerships, not with the 
approval of the CEO, the chairman or the board, but it is my 
understanding that Mr. Fastow and Mr. Skilling were aware of 
his participation in these partnerships. Is that also your 
understanding?
    Mr. Powers. Skilling told us that he knew about Chewco and 
Kopper's involvement in Chewco.
    Mr. Burr. So he would have to have known----
    Mr. Powers. And Fastow knew, yes.
    Mr. Burr. So both of them would have to have know of Mr. 
Kopper's involvement.
    Mr. Powers. Yes.
    Mr. Greenwood. And signed off on it?
    Mr. Powers. Not in anything that is--he may have verbally 
said, ``Go ahead and do it.'' He didn't sign off on it in a way 
that the approval is supposed to be obtained.
    Mr. Greenwood. In a document.
    Mr. Powers. Yes.
    Mr. Burr. On 10-6, Enron took a $544 million after-tax 
charge. They also, at the same time, reduced shareholder equity 
by $1.2 billion. Less than a month later, Enron restated its 
financial statement for 1997 through 2001 because of, and I 
quote, ``accounting errors'' relating to the transactions with 
these different partnerships. Who made the accounting errors, 
Enron, the partnership, Andersen or everybody?
    Mr. Powers. Enron, and to the extent that Andersen was 
doing the audits, Andersen and Enron.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman. Mr. Powers, if your committee isn't going to make any 
recommendations of discipline to the Board of Directors of 
Enron, then who is going to make disciplinary or who is going 
to put forth disciplinary charges against these people?
    Mr. Powers. Well, I think whether the government brings 
charges, the appropriate government officials are going to have 
to make, I don't think--one, frankly, we ran out of time, but I 
think many of these questions as to what Enron would do to 
these people will become moot. If they don't, somebody is going 
to have to make that determination. We did not.
    Mr. Stupak. Whether it does or does not, I guess, sitting 
from where we are sitting, it sort of seems like we have seen 
all the egregious actions. Someone has a responsibility here to 
hold people accountable, at least from an employment setting, 
but yet we are looking the other way and let someone else deal 
with it, and that seems to be the attitude with Enron----
    Mr. Powers. Yes.
    Mr. Stupak. [continuing] we will just look the other way 
and let these things go.
    Mr. Powers. Well, I don't think--I doubt if Enron is going 
to be able to look the other way on these. Enron came out with 
a press release, I believe, on Saturday, it might have been 
Sunday, that appointed a committee to restructure--to look into 
restructuring the board, and I would anticipate that process 
will go forward with the cooperation of the Creditors 
Committee.
    Mr. Stupak. Was the--the charge you received in your 
committee to do this investigation, was that one of your 
charges, to make recommendations as to any action that should 
be taken?
    Mr. Powers. Yes, it was. I believe the understanding would 
be that it would be an ongoing company when we finished our 
investigation, and that turned out not to be true.
    Mr. Stupak. Well, will your investigation continue now and 
look at any of this possible disciplinary action, at least from 
an employment setting?
    Mr. Powers. We haven't made that determination. I will take 
the opportunity to say being the dean of the University of 
Texas Law School is a demanding, full-time job, and my fervent 
hope is I can return to that task.
    Mr. Stupak. But even--and I am sure you will return and do 
an incredible job there, but will you remain on the board then 
at Enron?
    Mr. Powers. I anticipate that I will not.
    Mr. Stupak. Okay. Well, I guess, you know----
    Mr. Powers. I would like to--I need to fulfill my 
obligations to the SEC, and I will do that. But otherwise I 
anticipate that I will not.
    Mr. Stupak. Okay. Well, we just don't want--you know, I 
guess I said in my opening statement, there are a lot of these 
people who are responsible for this whole debacle who are still 
sitting there--still drawing salaries, still sitting on boards, 
still sitting in key senior management positions. And I would 
think if we are ever going to clean this thing up and come out 
of bankruptcy as a credible company, the board and, as I said 
in my opening, maybe senior management should be replaced. I 
just thought it was odd that your committee had an opportunity 
to at least make some recommendations like that, and once again 
it was sort of left at the wayside.
    Mr. Powers. But by not doing that, we did not in any way 
mean to indicate that what you are suggesting is not the 
appropriate outcome.
    Mr. Stupak. So other than the SEC, who else would take 
disciplinary action or action against these individuals?
    Mr. Powers. The Department of Justice I think will be 
looking into these.
    Mr. Stupak. Okay. You indicated to Mr. Dingell's question 
that in fact you did talk to Cliff Baxter.
    Mr. Powers. I didn't personally, but the committee did.
    Mr. Stupak. Your committee did. And he was the vice 
president in Mr. Lay's office. You said there were three people 
in there?
    Mr. Powers. He was, for a time, a vice chairman and part of 
the Office of the Chair.
    Mr. Stupak. Okay. And, actually, in the Watkins memo, I 
believe she said that you should talk to Mr. Baxter, especially 
on the LJM and Raptor transactions.
    Mr. Powers. Yes, that is correct.
    Mr. Stupak. So what did Mr. Baxter say then about--did you 
ask him about these two transactions or your committee ask him 
about these two transactions in particular?
    Mr. Powers. We interviewed him, and he was troubled by 
these transactions and expressed that in his interview as well.
    Mr. Stupak. How long did this interview take place? You 
said the one with Mr. Fastow was an hour.
    Mr. Powers. People think a couple of hours. I am not sure 
the person who interviewed Mr. Baxter.
    Mr. Stupak. Would these interviews be recorded or would 
there be notes of these interviews available?
    Mr. Powers. Yes.
    Mr. Stupak. Would you make them available to the committee?
    Mr. Powers. I certainly would. I would support that. Much 
of this is the property of the company, and I am not in a 
position to authorize releasing it. I personally, and the 
committee would certainly support releasing those; we want to 
cooperate in every way we can and provide information to this 
committee.
    Mr. Stupak. It may be something that we have to talk to the 
chairman later, if need be. To cover everyone's grounds here, 
we may have to do a subpoena or something like that. It just 
looked like he was a critical part in the Watkins memo, and 
unfortunately we will never have a chance to talk with him. So 
if there is some interview there that we can review that may 
give us more leads, it would probably be prudent----
    Mr. Powers. From my point of view, I am happy to do what I 
can to bring that about.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Kentucky, Mr. Whitfield?
    Mr. Whitfield. Dean, from your discussion with those people 
who did interview Mr. Baxter, was there anything particular 
that stood out with the committee as to your interview with 
him? Was there any----
    Mr. Powers. One would not have looked through all of the 
interviews and thought this is somebody who particularly would 
be in danger.
    Mr. Whitfield. Now, what are your areas of expertise in the 
law?
    Mr. Powers. I teach torts and products liability, I teach 
some legal philosophy, and then I have also taught contracts 
and some other subjects.
    Mr. Whitfield. I see.
    Mr. Powers. Insurance law.
    Mr. Whitfield. In your report, you talk about the two 
characteristics of SPEs: One, there must be 3 percent equity by 
an independent group, and, two, that there not be any control 
by Enron. And there were a number of those transactions that 
obviously did not meet that criteria, which meant that the 
financial statements should be consolidated. From your 
information or from your knowledge, is that a violation of any 
law?
    Mr. Powers. I don't know. Whether it is just a violation of 
accounting principles or law--if it is misrepresented on the 
financials, that might pick up the securities reporting laws, 
but just the mere accounting violations, I don't know the 
answer to that question.
    Mr. Whitfield. So you are not aware of that?.
    Mr. Powers. I am not, correct.
    Mr. Whitfield. Now, Vincent & Elkins is no longer legal 
counsel for Enron; is that correct?
    Mr. Powers. I don't know the answer to that.
    Mr. Whitfield. I thought that you had indicated to me that 
they had been dismissed by Enron.
    Mr. Powers. No, Andersen. I do know that Andersen was 
dismissed by Enron, because that was the reason they gave us 
for not cooperating further.
    Mr. Whitfield. What was Mr. Fastow's position with Enron?
    Mr. Powers. He was the chief financial officer.
    Mr. Whitfield. Do you happen to know what his salary was?
    Mr. Powers. I don't know myself. It was very substantial, 
but I don't have the figure in my head right now.
    Mr. Whitfield. But from these independent transactions that 
he was involved in, you said that he received at least $30 
million from those.
    Mr. Powers. That is what the evidence indicates to us, yes.
    Mr. Whitfield. And when he realized that he was not going 
to be able to manage Chewco, he did bring in Mr. Kopper; is 
that correct?
    Mr. Powers. Yes.
    Mr. Whitfield. And Mr. Kopper did report directly to Mr. 
Fastow; is that correct, at Enron?
    Mr. Powers. Yes, at Enron, that is correct.
    Mr. Whitfield. And then once Mr. Kopper took his management 
position in the SPE, at some point Enron entered into 
negotiations to purchase back the interest of Chewco; is that 
correct?
    Mr. Powers. Yes, that is correct.
    Mr. Whitfield. And the gentleman that was negotiating for 
Enron on behalf of Enron's interest, did he also report to 
Fastow at Enron?
    Mr. Powers. It was Fastow himself who negotiated that, I 
believe.
    Mr. Whitfield. Oh, Fastow himself negotiated with Kopper?
    Mr. Powers. Yes.
    Mr. Whitfield. But wasn't there one incident in another 
transaction where an employee of Enron was negotiating with 
Kopper and Mr. Fastow intervened?
    Mr. Powers. Yes.
    Mr. Whitfield. And that person reported to Mr. Fastow, 
correct?
    Mr. Powers. I believe that is correct, yes.
    Mr. Whitfield. And Mr. Fastow basically ordered him or told 
him to accept the terms as Mr. Kopper offered it; is that 
correct?
    Mr. Powers. Right, correct.
    Mr. Whitfield. Do you know the name of that employee?
    [Pause.]
    Mr. Powers. Thank you for your indulgence, Congressman. 
There is a lot of detail here, and it is hard to keep it all 
straight, and I want to be accurate. In one of them, it was 
Bill Brown.
    Mr. Whitfield. Bill Brown?
    Mr. Powers. Yes. In the other, we would want to go back and 
check the records, if we have that.
    Mr. Whitfield. But Bill Brown did report to Fastow at 
Enron.
    Mr. Powers. Yes.
    Mr. Whitfield. Did Mr. Fastow's wife work at Enron?
    Mr. Powers. Yes, she did.
    Mr. Whitfield. Was she in the same general area of the 
company that he was in or do you know?
    Mr. Powers. I am not sure. She was in the finance area, 
generally.
    Mr. Whitfield. Okay. So she was in the finance area with 
Mr. Fastow?
    Mr. Powers. Yes.
    Mr. Whitfield. And--I see my time has expired here anyway, 
so----
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentlelady from Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Powers, it looks 
to me from Martindale Hubble that your specialty is really 
products liability.
    Mr. Powers. Yes.
    Ms. DeGette. That is your academic specialty, right?
    Mr. Powers. That is one of them.
    Ms. DeGette. Okay. Certainly not securities issues.
    Mr. Powers. Absolutely.
    Ms. DeGette. And Wilmer, Cutler & Pickering was your legal 
counsel and Deloitte and Touche was your accounting firm.
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. Are these three gentlemen behind you with one 
or the other of those firms?
    Mr. Powers. They are from Wilmer, Cutler & Pickering.
    Ms. DeGette. I know you have been getting advice from them 
today, and I am wondering if you can identify for the record 
who they are?
    Mr. Powers. Yes. Bill McLucas, Chuck Davidow and Joe 
Brenner.
    Ms. DeGette. Thank you very much.
    Mr. Powers. And I have just been trying to get factual 
information from them.
    Ms. DeGette. No, you are doing great. You are doing a lot 
better than I could do in your position, certainly.
    Mr. Powers. Thank you.
    Ms. DeGette. I want to follow up on a couple of questions 
that Chairman Tauzin asked you about Rhythms. In your report, 
you noted that the Rhythms transaction was the first business 
dealing that Enron had with the LJM partnership, and that it is 
significant because, No. 1, it was the first time Enron 
transferred its own stock to an SPE and used the SPE to hedge 
an Enron investment. No. 2, it was the first and perhaps most 
dramatic example of how the purportedly arms-length 
negotiations between Enron and the LJM partnerships resulted in 
economic terms skewed toward LJM and enriched Fastow and 
others. And, third, because in Rhythms the investors included 
Enron employees who were secretly offered financial interests 
by Fastow, right?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. Okay. I want to walk through this a minute, 
because I thought the chairman got us to a good point, but I 
think we need to talk about why this was inappropriate. The 
first thing that happened was in March 1998, Enron invested $10 
million in Rhythms, which was a privately held company, 
correct?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. And then on April 7, 1999, Rhythms went public 
at $21 a share, and then it spiked up to $69 that day.
    Mr. Powers. Yes.
    Ms. DeGette. Right?
    Mr. Powers. Yes.
    Ms. DeGette. The second thing that happened was by May 
1999, Enron's investment in Rhythms was worth about $300 
million, but Enron was prohibited from selling its shares by 
the end of 1999, right?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. And so then what happened was Skilling was 
afraid that because Rhythms was so volatile he wanted to hedge 
the position to capture the value already achieved and to 
protect against further volatility, right?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. And, in fact, I can tell you Rhythms was a 
very volatile company, because it just went out of business 
last year.
    Mr. Powers. Yes.
    Ms. DeGette. So it was very volatile. All of those would be 
generally accepted business practices.
    Mr. Powers. Absolutely. There is nothing wrong with that if 
the hedges were proper.
    Ms. DeGette. Right, there is nothing wrong with that. But 
here is where the problem came in and here is where the 
beginning of the precedent for the later partnerships started. 
Enron wanted to take advantage of the increase in value in 
Enron stock, but it can't--under general accounting principles, 
it can't recognize an increase in its own value of its stock as 
income, right?
    Mr. Powers. Yes, that is absolutely correct.
    Ms. DeGette. So what it wanted to do was look at this as a 
trapped value, right?
    Mr. Powers. That is what they wanted to do.
    Ms. DeGette. So then what happened is Fastow and others 
developed a plan to hedge the Rhythms investment by taking 
advantage of the value in Enron shares covered by the forward 
contracts, and that is when they created the limited 
partnership, SPE, right?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. And it was capitalized with the appreciated 
Enron stock, right?
    Mr. Powers. Yes.
    Ms. DeGette. And that is where the hedging transaction 
created the problem, and that is where the problem was, right?
    Mr. Powers. Absolutely.
    Ms. DeGette. And that is against general accepted 
accounting principles, as far as we know, right?
    Mr. Powers. Yes. You have captured it exactly.
    Ms. DeGette. And SEC law too, as far as we know.
    Mr. Powers. I would have to look at SEC law, but it 
certainly ought to be looked into.
    Ms. DeGette. Right. Okay. And this was kind of the model 
then for what happened afterwards.
    Mr. Powers. Yes.
    Ms. DeGette. Okay. Let me talk to you for a few minutes 
about Rick Causey. He is Enron's chief accounting officer, was 
and still is today, right?
    Mr. Powers. I have heard newspaper reports that he--I heard 
reports when I presented this document to the board on Saturday 
that he had resigned the week before.
    Ms. DeGette. Okay. But he was up until a----
    Mr. Powers. Up until last week.
    Ms. DeGette. [continuing] couple of days ago.
    Mr. Powers. And I don't know that he--that report may be 
accurate. I am just saying I got that report.
    Ms. DeGette. Okay. You mean you don't always trust the 
press. Based on the accounting advice your investigation 
received, you concluded in your report that Mr. Causey's 
accounting judgment, ``went well beyond the aggressive.''
    Mr. Powers. Yes.
    Ms. DeGette. What does that mean?
    Mr. Powers. I think Mr. Causey was not providing proper 
accounting supervision in the company.
    Ms. DeGette. That, in your view, is well beyond the 
aggressive?
    Mr. Powers. Yes.
    Ms. DeGette. Thank you. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognizes the gentleman from Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman. I am just curious, 
the chairman opened up his questions with a reference to Star 
Wars and Luke Skywalker and Darth Vader. When you and your 
colleagues interviewed Kenneth Lay, did he feel like he was 
Darth Vader? I mean did he feel like he was a bad guy?
    Mr. Powers. He certainly did not indicate that to us.
    Mr. Stearns. Did he feel like he was a noble public servant 
and doing the right thing?
    Mr. Powers. That certainly was the attitude he conveyed.
    Mr. Stearns. So all during the 4 hours, he felt that he had 
done nothing wrong.
    Mr. Powers. I think he felt that he had not been watching 
carefully enough, but he certainly indicated that he thought 
he--I am reporting what he said--that----
    Mr. Stearns. Well, that is what I am asking you to do.
    Mr. Powers. [continuing] he had been betrayed and should 
have looked more carefully.
    Mr. Stearns. So his position has been that he was betrayed, 
he was high above and didn't know all the details.
    Mr. Powers. That was the position, yes.
    Mr. Stearns. Okay. Mr. Winokur served as chairman of 
Enron's Finance Committee.
    Mr. Powers. Yes.
    Mr. Stearns. Did you folks interview Mr. Winokur regarding 
his role as chairman of the Finance Committee?
    Mr. Powers. Yes, we did.
    Mr. Stearns. And you went into his understanding of the LJM 
transaction?
    Mr. Powers. Yes.
    Mr. Stearns. Okay. Your committee reports, quote, ``We have 
identified some evidence that in three of the transactions 
where Enron ultimately bought back LJM's interest, Enron had 
agreed in advance to protect the LJM partnerships against 
loss.''
    Mr. Powers. Yes, we say that.
    Mr. Stearns. Okay, you say that. That is on page 12.
    Mr. Powers. And that is correct.
    Mr. Stearns. Okay. How did Enron do this, and if that was 
true, and Mr. Winokur is chairman of the Finance Committee, is 
that something that he could accept in his role to have them, 
as you say, protect LJM's partnership against loss by 
guarantying?
    Mr. Powers. Well, we didn't have any evidence that the 
Finance Committee, or the Chair of the Finance Committee, was 
aware of those sort of side agreements to buy back from LJM1.
    Mr. Stearns. But wasn't his role to understand these 
transactions?
    Mr. Powers. Our understanding was that these were informal 
side assurances that don't worry----
    Mr. Stearns. Well, wait a second. On October 11, 1999, Mr. 
Winokur presented the LJM2 proposal to the board of directors.
    Mr. Powers. Yes.
    Mr. Stearns. Okay. That is what the minutes show. And he 
said that he put in controls, indicated he discussed the 
controls that would be used to guaranty LJM/Enron's transaction 
would be fair to Enron.
    Mr. Powers. Yes.
    Mr. Stearns. And so he had some knowledge of this, although 
you are just saying----
    Mr. Powers. Well, he had knowledge of the structure, and he 
had knowledge of the kinds of transactions that would take 
place between Enron and LJM, and the committee put in controls 
to attempt, unsuccessfully, to mitigate the risks of conflict.
    Mr. Stearns. Okay. What kind of controls did he put in 
place to, as you say, mitigate, to prevent the loss?
    Mr. Powers. Causey and Rick Buy and Skilling were supposed 
to look at these transactions and approve them to ensure that 
they were either arms length, or similar to arms length 
transactions and were not sweetheart deals. Those were the 
controls that were put in place.
    Mr. Stearns. Well, it is one thing to put in controls, but 
then you have got to implement them. So what did he do to make 
sure and go back--trust and verify, as we would say? What did 
he do?
    Mr. Powers. Right. I think the board and the committee did 
not--I am not saying they did not do anything to go back, but 
they certainly--the controls were not followed.
    Mr. Stearns. So you admit that he had no trust and verify 
of his controls in place.
    Mr. Powers. Well, I wouldn't say no trust and verify, 
inadequate trust and verify.
    Mr. Stearns. On page 105 of the report, it notes that Jeff 
Skilling's signature is missing from the LJM2 approval sheet 
for Raptor I. What knowledge did Skilling have of the Raptor I 
transaction?
    Mr. Powers. Skilling certainly knew about the transaction 
that set up the Raptors.
    Mr. Stearns. But why wouldn't he sign it?
    Mr. Powers. I am sorry?
    Mr. Stearns. Why wouldn't he sign it?
    Mr. Powers. This is an approval sheet for hedging--
individual hedging deals between the Raptors and Enron after 
the Raptors had been set up. It wasn't an approval sheet to 
approve the setting up of the Raptors. The board did that.
    Mr. Stearns. So in your opinion, his signature wasn't 
needed?
    Mr. Powers. I am sorry. This was an approval sheet for 
setting up that Raptor. He didn't sign it; he was at the board 
meeting that approved it.
    Mr. Stearns. And so why didn't he sign it? I mean I am not 
asking you.
    Mr. Powers. Right.
    Mr. Stearns. I mean just don't you think that that shows 
something?
    Mr. Powers. Right.
    Mr. Stearns. And what do you think that shows, the fact 
that he doesn't sign it, as a lawyer?
    Mr. Powers. He was at the board meeting that approved it. 
He was at the board meeting that approved it. I really don't 
know whether--I don't know why he didn't sign it.
    Mr. Stearns. But the thing that strikes me here is Winokur 
was, as chairman of the Finance Committee, he was responsible 
for putting in the controls and then making sure the controls 
were implemented. Now, wasn't he part of this report? Wasn't he 
on your board on this report?
    Mr. Powers. He was. He did recuse himself from the 
judgments about the board. Mr. Troubh and I had several 
conversations with counsel independently without Mr. Winokur 
when we made our conclusions about the board.
    Mr. Stearns. Do you think Skilling knew about these side 
agreements that were protecting these partnerships and ensuring 
that Enron would guaranty them?
    Mr. Powers. From the evidence that I have seen, I don't 
know that I can answer that. There is a great deal of evidence 
that he knew about the transactions.
    Mr. Stearns. And you are saying Mr. Winokur had no idea 
also about these side agreements, and he never followed up with 
a trust and verify, he never did some verification of the 
controls that he put in place?
    Mr. Powers. I think these are going to take further 
investigation. I can say what we were able to ascertain from 
our interviews and evidence, and we don't have any evidence 
that he was aware of those side agreements.
    Mr. Stearns. Thank you, Dean.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from Louisiana, Mr. John.
    Mr. John. Mr. Powers, on Friday, the Wall Street Journal 
reported that Mr. Lay told other Enron officials that he had 
never heard of Chewco. In your 4-hour interview with him, did 
he indicate anything to that effect or did he tell you that? 
Chewco.
    Mr. Powers. He was at the Executive Committee meeting that 
approved the transaction. He did say at his interview that he 
didn't recall the name.
    Mr. John. Thank you. The rest of my questions really are 
going to be focused on the accounting side with Mr. Causey, 
because I think that it is very important. Your report 
specifically states that Mr. Causey was charged by the board of 
directors with a substantial role in the oversight of Enron's 
relationship with the LJM partnerships; in fact, he was 
supposed to review and approve every transaction----
    Mr. Powers. Yes, that is correct.
    Mr. John. [continuing] within LJM to determine if it was in 
the best interest of Enron.
    Mr. Powers. Yes.
    Mr. John. And then he was supposed to report that to the 
board of directors, correct?
    Mr. Powers. Yes.
    Mr. John. Mr. Causey told the board everything was fine, 
even though his approvals came after the deals were finalized. 
Without Mr. Skilling's signature and your report concludes that 
many of the most significant transactions apparently were 
designed to accomplish favorable financial statement results, 
not to achieve bona fide economic objectives or a transfer of 
risk. Again, according to your report on page 4, the 
transactions did not follow the applicable accounting rules. 
What was Mr. Causey's excuse in your interview with him for not 
carrying out these duties?
    Mr. Powers. In this interview, he said that he thought he 
was responsible only for signing off on the accounting, which, 
in our view, was not consistent with what his charge was by the 
board.
    Mr. John. But he was in fact the chief accounting officer.
    Mr. Powers. He was.
    Mr. John. In fact, in one instance, involving a Fastow 
partnership named Talon, on page 108 in your report----
    Mr. Powers. Yes.
    Mr. John. [continuing] Mr. Causey actually backdated a 
document of a swap so that Enron would not have to show about 
$75 million on its quarterly financial statements. Backdating 
documents to hide losses from shareholders, is that fraud?
    Mr. Powers. Well, backdating is extremely serious. I would 
have to trace through what was then reported to the 
shareholders to determine--and backdating the intent does seem 
easy. And I don't--I need to check. There was backdating, we 
did find evidence of backdating in some of these transactions, 
which is, individually, very serious. I would have to check.
    Mr. John. As it relates to Talon.
    Mr. Powers. Yes. That is the first Raptor vehicle, and 
there were hedges with the Raptor vehicle, and we found very 
compelling evidence that some of those transactions were 
backdated.
    Mr. John. And in your own words, these are very serious 
when you----
    Mr. Powers. Yes, very serious.
    Mr. John. Mr. Powers, Mr. Causey told our investigators 
here that he didn't see the collapse of Enron coming and awoke 
to it once the Wall Street Journal began reporting on the 
company's troubles in October of last year. In your expert 
opinion, shouldn't the chief accounting officer and the person 
responsible of approving every single transaction with Mr. 
Fastow's entities, have identified some warning signs? Don't 
you think there should have been some warning signs before 
October of last year.
    Mr. Powers. Absolutely.
    Mr. John. If so, what do you think he should have seen or 
did not come--what do you think--give me maybe an idea of what 
maybe he should have at least notified the board of, or Mr. 
Fastow, or alerted them?
    Mr. Powers. Well, as we document in the report, these were 
not real transactions, and he was the chief accounting officer, 
and should and I think did--he certainly knew about the nature 
of the transactions. And has subsequently turned out, that 
structure made the company extremely fragile economically, 
because it wasn't solidly backed, and he should have warned the 
board about that, he should have talked to senior management 
about it. He was the chief accounting officer, he should have 
done something about it.
    Mr. John. Real quick, if you could summarize, I guess, Mr. 
Causey's failures as the lead accountant of the company, how 
would that summary read?
    Mr. Powers. He was not an effective check on Mr. Fastow, 
and the accountant needs to be an effective check.
    Mr. John. Was it a lack of his credentials and his training 
and background?
    Mr. Powers. Not to my knowledge.
    Mr. John. Thank you.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman. Dean Powers, you have 
obviously overseen a very detailed report here, an 
investigation, and in the very end of your testimony, in the 
last very paragraph, in the first sentence, you say, ``In the 
end, this is a tragedy that could and should have been 
avoided.'' Without getting into the kind of detail where you 
are discussing what individuals did or didn't do, who signed 
what, who was reporting to who, who transferred money from here 
to there, how could this tragedy have been avoided, in your 
opinion?
    Mr. Powers. Well, as somebody who invests at a very, very 
modest level myself, I see the idea of statements to the public 
that there should be transparency in the financial condition of 
a company. And if there was more transparency about the 
finances of Enron, the market would have reacted to that and, 
frankly, adjusted in ways that wouldn't have let Enron get away 
with it, if there had been more transparency.
    Mr. Bass. Well, then what, in your opinion, aspects of the 
regulatory structure created an environment in which there 
wouldn't be the kind of transparency that should have been with 
Enron?
    Mr. Powers. I want to give the judgments that I feel I can 
give. I am not, in any way, an expert in securities regulation 
and how that regulatory structure would have or might have 
detected some of these problems.
    Mr. Bass. Well, is, in your opinion, the Enron 
investigation, in general, then, primarily a criminal or a 
justice-related investigation dealing with individuals who may 
have broken the law? Or are there thematic conclusions from 
your report that require increased or more aggressive oversight 
on the part of either regulators or policymakers, like the 
Congress?
    Mr. Powers. Well, I think there certainly was individual 
wrongdoing that needs to be investigated by the proper 
authorities. But I think there are larger issues that are 
raised by what we found in our report.
    Mr. Bass. What larger issues are you thinking about?
    Mr. Powers. Yes, they deal with 401(k) plans, they deal 
with the accounting industry. Not having looked into them and 
not being an expert, I don't know that I have particular 
suggestions, but I do think those are important issues that the 
Congress and the committees need to look into.
    Mr. Bass. This may be a repetitive question, but the second 
sentence in your last paragraph says that you hope that our 
report and the work of your committee will help reduce the 
danger that it will happen to some other company. How do you 
think that?
    Mr. Powers. Well, I think by bringing to light what 
happened, I hope that your committee, other congressional 
committees at least have a starting point as to some of the 
problems, and that this will help, in a small way, to focus 
attention on some of these problems and that our Congress, 
State legislators, other regulatory and policymaking groups 
will respond to some of these problems.
    Mr. Bass. One last question, Dean Powers. Were there any 
questions that--are there any questions that have come about as 
a result of the report that you are presenting or the 
investigation that you conducted that you don't have answers to 
at this point?
    Mr. Powers. You mean with respect to the particular events?
    Mr. Bass. Yes.
    Mr. Powers. Oh, absolutely. Much more needs to be done. Who 
knew what when? We, again, did not have subpoena power, did not 
have true cross examination power, and I think this report is 
just a start.
    Mr. Bass. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman. The 
gentleman from Florida, Mr. Stearns, made reference to a 
document that I would, without objection, enter into the 
record. It is an excerpt from the October 11 and 12, 1999 Enron 
Corporation Board of Directors meeting.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T7985.010
    
    [GRAPHIC] [TIFF OMITTED] T7985.011
    
    [GRAPHIC] [TIFF OMITTED] T7985.012
    
    Mr. Greenwood. The Chair recognizes the gentleman from 
Illinois, Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman. Mr. Powers, I want to 
commend you on your stamina. This has been a very long session, 
and you have certainly stood up quite well.
    Mr. Powers. Thank you.
    Mr. Rush. Again, I commend you for your stamina. Our 
investigators were also told that Enron had more than 900 
accountants reporting to Mr. Causey, and I think that my 
colleague from Louisiana, Mr. John, pointed to this direction. 
And this 900 accountants does not include the nearly 100 
accountants that Arthur Andersen supplied to audit Enron. How 
is it possible that Mr. Causey could not see this train wreck 
coming when he apparently had almost 1,000 accountants on the 
Enron work force?
    Mr. Powers. I think it is that Mr. Causey, as the chief 
accountant, would have seen these problems.
    Mr. Rush. You think that he actually saw this problem.
    Mr. Powers. I think he certainly should have, and I would 
expect that he would have.
    Mr. Rush. Okay. Well, with all these accountants, 900 
accountants of its own, who had access to all these internal 
records, in your opinion, how can Enron blame Arthur Andersen 
alone for not revealing the accounting shenanigans that were 
taking place? And are Enron's accountants simply incompetent or 
not well trained or shouldn't they have known Enron's numbers 
even more than Andersen should?
    Mr. Powers. We certainly did not intend to, and I don't 
think we have, made judgments or, as you put it, blamed 
Andersen alone. I think the Accounting Department within Enron 
and people outside the Accounting Department, including all of 
the people in management and the board, bear responsibility for 
this.
    Mr. Rush. Well, I want to return quickly, if I could, back 
to Mr. Fastow. One conclusion surfaces from our investigation 
into Enron is that on one was minding the store. It was almost 
like the fat rat was in the cheese factory, and the cat was on 
vacation. No single person appeared willing to come forward and 
say it was their job to take a big picture view of the 
multitude of deals and transactions taking place to assess how 
much risk the company was assuming. Shouldn't that job have 
been the chief financial officer's job or Mr. Fastow's job?
    Mr. Powers. Well, I think the chief financial officer--I am 
sorry, the chief financial officer or the chief accounting 
officer?
    Mr. Rush. The chief financial officer.
    Mr. Powers. The chief financial officer. Well, the chief 
financial officer is certainly responsible for the financial 
aspects of the company, and certainly these were within the 
financial areas of the company. The problem with Mr. Fastow 
wasn't in a position to mind the store, because he was 
personally and directly involved in these transactions.
    Mr. Rush. Well, isn't it true also, according to your 
report, you term Mr. Fastow as a, quote, ``walking conflict of 
interest,'' and that Mr. Fastow got more income from his 
outside businesses in 2 years than he did from Enron; is that 
accurate?
    Mr. Powers. He certainly got very substantial income from 
these outside investments.
    Mr. Rush. Mr. Fastow, I call him ``Fast Andy,'' Fast Andy 
was known to curse and abuse people who got in the way of his 
partnerships. He told Mr. Jeff McMahon, the treasurer, that he 
couldn't work with him because McMahon was, quote, ``screwing 
up his deals.'' Where was the chairman at in all of this? Why 
didn't the chairman put a stop to this?
    Mr. Powers. Well, McMahon went and complained to Skilling, 
and Skilling then transferred McMahon to another part of the 
company. And Skilling, from our information, then didn't do 
anything about McMahon's very accurate and serious issues that 
he had raised with Skilling.
    Mr. Rush. I have one final question, Mr. Chairman, if I 
could. I want to get back to the Talon transaction. Mr. Fastow 
negotiated directly with Mr. Causey, putting together a deal 
that gave LJM2 $41 million for basically nothing, according to 
your report on page 108; is that right?
    Mr. Powers. I want to clarify this.
    [Pause.]
    Mr. Powers. I think it was Ben Glisan who was involved in 
that negotiation, and I don't want to be inaccurate about the 
other person involved in it. I would have to go back and look 
more carefully.
    Mr. Rush. Thank you, Mr. Chairman. I yield back.
    Mr. Greenwood. The Chair thanks the gentleman. The 
gentleman from Texas, Mr. Green, is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman, and, again, I would 
like to thank you for your courtesy as allowing me as the 
member of the full committee but not of the subcommittee to 
come in and ask questions. I want to continue following up what 
my colleague from Chicago mentioned on that LJM2, the $41 
million. Sorry, I didn't hear the answer. Do you think he 
violated Mr. Fastow--by negotiating directly, Mr. Causey 
violated an agreement not to negotiate with these entities?
    Mr. Powers. I think Fastow was negotiating on LJM. There is 
lots that Fastow did wrong, but in that negotiation, I believe 
he was negotiating on LJM's side. He was not negotiating----
    Mr. Green. On Enron's side.
    Mr. Powers. [continuing] on Enron's side. Now, the idea of 
Fastow and Causey doing a real arms-length negotiation is very 
problematic.
    Mr. Green. Okay. And Mr. Causey, by representing Enron, 
could have stopped that negotiation, I guess.
    Mr. Powers. Well, that kind of negotiation with LJM had 
been approved. He and others could have identified the 
inappropriate nature of the conflict of the whole structure.
    Mr. Green. Who else is in a position to stop or disagree 
with the inappropriateness, as you said, of the whole 
structure? Our staff was told yesterday anyone with an 
understanding of how general partners are paid would have 
quickly understood that Mr. Fastow would get at least $15 
million from the LJM2 alone. Was anyone at Enron or his board, 
were they that inexperienced in the world of finance that they 
couldn't do the same calculations?
    Mr. Powers. That is certainly a question that we had. LJM1, 
I think the board looked into more carefully. It was a much 
smaller partnership, and those calculations came to a much more 
reasonable number. When LJM2 was set up, it was a much larger 
partnership. I think there was a sense that it was like LJM1, 
therefore let us go ahead and approve it. The problem was it 
was a much larger partnership, and if one had run these 
numbers, it would have suggested that Fastow might have a quite 
substantial return.
    Mr. Green. On page 43 of your report, it indicates Mr. 
Fastow had planned to merge Chewco until he was told that the 
participation be revealed in Enron's proxy statement.
    Mr. Powers. Yes, that is correct.
    Mr. Green. And at that point, Mr. Fastow substituted Mr. 
Kopper?
    Mr. Powers. Yes.
    Mr. Green. If anyone in the company knew this, do you think 
the board knew it?
    Mr. Powers. I don't----
    Mr. Green. And why do you think they knew it?
    Mr. Powers. We don't have any evidence that they did.
    Mr. Green. What are the--a CFO in a corporation, I know 
they have typically defined, particularly a company as large as 
Enron, have defined responsibilities. Isn't that person the 
person the investors and the shareholders depend on to give a 
credible picture of the company's finances?
    Mr. Powers. Well, the chief financial officer and the chief 
accounting officer, yes.
    Mr. Green. If Mr. Fastow was doing his job properly, would 
this train wreck would have happened?
    Mr. Powers. If Mr. Fastow had been doing his job properly, 
it would have substantially reduced. I can't say in hindsight 
whether it would have prevented it. They would have never 
gotten into these deals if he had been--if he had been raising 
questions about them, I think there is a substantial likelihood 
that this train wreck would not have happened.
    Mr. Green. So the debt just kept piling up. So Enron had 
too much debt, and too many bad investments kept piling up.
    Mr. Powers. It had a great deal of debt, and it had--I 
think if they had taken the--well, one can't tell what had 
happened. It wasn't just that they didn't take the loss on the 
investments and as they were happening take charges. They had 
these hedging arrangements that, in a sense, were acting as 
though those losses were not there.
    Mr. Green. Did your committee specifically find out what 
actions Mr. Fastow failed to do, to take, as CFO, that might 
dramatically have mitigated the events that overtook Enron?
    Mr. Powers. Well, he should have come forward and disclosed 
that he was self-dealing with the company on a much larger 
scale than he had ever indicated.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair would note his intention to initiate another round of 
questions. Mr. Powers, are you good for another half hour or 
so, or would you like a break?
    Mr. Powers. No, I am fine, Mr. Chairman.
    Mr. Greenwood. Okay. In that case, the Chair recognizes 
himself for 5 minutes. Mr. Powers, on page 43 of your report, 
it reads, ``Fastow told Enron employees that Jeffrey Skilling, 
then Enron's president and chief operating officer, had 
approved his participation in Chewco as long as it would not 
have to be disclosed in Enron's proxy statement.'' Who are the 
employees that Fastow told that to? How do you know that? If 
you need to consult----
    Mr. Powers. Well, let me read the statement. Could I----
    Mr. Greenwood. Please.
    Mr. Powers. One of the people he told was Bill Brown, who I 
mentioned before, and Mr. Brown has notes that reflect that.
    Mr. Greenwood. Do you have those notes that you could share 
with us?
    Mr. Powers. We don't have them here, and, again, I will 
support cooperating in every way, and I think the company will 
as well. I don't, myself, have the authority to dispose of the 
company----
    Mr. Greenwood. Do you know what Skilling said about that? 
Did Skilling comment on that observation?
    Mr. Powers. I believe Skilling said that he didn't----
    Mr. Greenwood. There is a footnote that says, ``Skilling 
told us that he recalled Fastow----
    Mr. Powers. Yes. Thank you.
    Mr. Greenwood. [continuing] proposing that the Chewco 
outside investors be members of Fastow's wife's family, and 
Skilling told Fastow he did not think that was a good idea.''
    Mr. Powers. Correct.
    Mr. Greenwood. Okay.
    Mr. Powers. Thank you.
    Mr. Greenwood. The Special Committee's report states Jeff 
Skilling appeared to be entirely uninvolved in the review of 
the Chewco transactions, despite, quote, ``representations made 
to the board that he had undertaken a significant role.''
    Mr. Powers. Yes.
    Mr. Greenwood. That is from page 10. What were these 
representations and who made them?
    Mr. Powers. I believe these are the LJM transactions. 
Chewco was more of an investment fund, and the LJM transactions 
were the transactions where there was more self-dealing. And 
Skilling represented to the board, or to the Finance Committee, 
I would have to clarify that Fastow represented to the board 
that these controls would be put in place. Skilling was at that 
board meeting when those representations were made, and the 
representations were that Skilling and Causey and Buy would 
review the transactions to make sure that they were at arms 
length and not self-enriching to Fastow.
    Mr. Greenwood. The Special Committee's report states that 
the critical piece of missing information relating to the 
Chewco transaction was the side agreement for the $6 million 
Enron collateralization of the partnership outside $11.4 
million equity investment by Big River Funding, LLC, which is a 
partnership controlled by Michael Kopper and his domestic 
partner, William Dodson. At least one Enron official, Ben 
Glisan, knew of these facts. Andersen says it knew nothing 
about this aspect of the Chewco transaction. What evidence did 
you uncover about who knew what and when with respect to this 
side agreement on Chewco?
    Mr. Powers. Well, we were able to ascertain that Glisan was 
involved in setting up--in doing the work around Big River and 
Little River. And he would have known that the loans from 
Barclay's were being backed by reserve accounts that had been 
provided by distributions from JEDI, but let me make sure I get 
this right. I am told we don't have notes that definitely pin 
that down.
    Mr. Greenwood. How did you discover this side agreement? 
Who found out about that?
    Mr. Powers. Well, when these issues--there is some 
unclarity as to whether we have those notes or not. Let me just 
clarify. I am sorry. We do have notes that show that Glisan was 
at meetings where the reserve accounts were described.
    Mr. Greenwood. And we would ask that you share those notes 
with our staff.
    Mr. Powers. The same thing.
    Mr. Greenwood. Thank you.
    The Special Committee's report also states that if Glisan 
in fact knew about the $6 million side agreement, it is, 
``implausible that he or any other knowledgeable accountant 
would have concluded that Chewco met the 3 percent standard.'' 
That is from page 53. Since the Special Committee's report 
concludes that Glisan knew about the side agreement, are you in 
effect saying that he knowingly approved faulty accounting for 
this transaction?
    Mr. Powers. To the extent he was at that meeting and to the 
extent that he knew, our view is that a knowledgeable 
accountant like Glisan would know that was faulty accounting. 
We did not come across anyone who, once they understood the Big 
River and Little River loans were backed by essentially Enron 
dispersements from JEDI, everybody agreed immediately that that 
was an improperly funded SPE.
    Mr. Greenwood. My understanding is that the $6 million side 
agreement was not discovered until late October of 2001, after 
Enron started to look more closely into this transaction. Do 
you know who at Enron discovered this side deal and how the 
discovery actually took place?
    Mr. Powers. No, I am sure we do.
    [Pause.]
    Mr. Powers. I want to clarify one thing. It may very well 
be that people at Enron knew about this before it came up in 
October. The larger Enron group, the accounting and legal 
staff, went back and started looking into it as events started 
to unfold in October. And I don't have the individuals, but, 
again, I think----
    Mr. Greenwood. Was it found in Enron's documents? Was it 
found in Vincent & Elkins' documents?
    Mr. Powers. In Enron's documents and I think both.
    Mr. Greenwood. Both? Okay. The Chair recognizes the 
gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. I know we have been 
talking about Mr. Powers, so let me just go back to a question. 
Actually, Mr. Fastow widely reported questionable activities, 
directly or indirectly, paramount to fraud on Enron 
stockholders. It was his concealment of the lack of independent 
equity in these partnerships that kept the losses off Enron's 
books for at least 2 years. Isn't that fraud on the 
shareholders?
    Mr. Powers. My only hesitation is I don't know myself the 
securities definition of fraud because that is not my field. It 
is misrepresenting things to the shareholder.
    Mr. Deutsch. All right. The Wall Street Journal reported 
last week that Mr. Fastow and Mr. Skilling dreamed up all of 
these partnerships to hide debt and hedge losses. Mr. Fastow 
was required under the company's code of conduct to reveal his 
interests in these partnerships in writing to Mr. Lay and Mr. 
Skilling. Did Mr. Skilling received such a document in writing, 
as required under the agreement?
    Mr. Powers. The evidence we have is that Skilling got a 
handwritten note from Fastow.
    Mr. Deutsch. Have you seen it?
    Mr. Powers. Yes--oh, no. That is just reported to us.
    Mr. Deutsch. Did Mr. Skilling ever ask for legal advice, 
either from inside or outside the company, on the procedures 
for waiving the code of conduct and what was appropriate and 
what was not?
    Mr. Powers. I don't know. Not to my knowledge.
    Mr. Deutsch. Did Mr. Skilling ever consider that an 
officer's loyalties might be conflicted if he was receiving 
more income from his non-Enron business than from his Enron 
job?
    Mr. Powers. Did he consider that?
    Mr. Deutsch. That is correct.
    Mr. Powers. The interview with Fastow did not reveal much 
information where we could get an answer to that question.
    Mr. Deutsch. Right, but it would seem Mr. Skilling, in 
terms of evaluating where his loyalties would be.
    Mr. Powers. Oh, I am sorry. Yes, certainly, Mr. Skilling 
and everyone involved in approving LJM1 and LJM2 understood 
that there would be a conflict of loyalties that Fastow had.
    Mr. Deutsch. And Mr. Skilling and the board could have 
required Mr. Fastow to share his offering documents and reveal 
his fee structure; is that correct?
    Mr. Powers. That is correct. I believe the board and 
management could have done that.
    Mr. Deutsch. And why didn't they?
    Mr. Powers. Their explanation is that they wanted to make 
the LJM partnerships as, ``independent'' as possible, and 
looking into the financial structure of the partnerships would 
somehow be inconsistent with that. We still think they could 
have gotten K-1s and other information about Mr. Fastow's 
remuneration.
    Mr. Deutsch. Right. And, again, it seems as if your concern 
is really a conflict, that would be almost a requirement to 
understand that.
    Mr. Powers. I would think, at a minimum, you would want to 
know what the compensation for Ms. Fastow would be.
    Mr. Deutsch. Did Mr. Skilling ever ask to see any of the 
offering papers of the Fastow entities?
    Mr. Powers. Not to my knowledge.
    Mr. Deutsch. According to a Fortune magazine article, Mr. 
Skilling errantly responded to those who questioned how Enron 
made its money by saying, ``People who raise questions are 
people who have not gone through our business in detail and who 
want to throw rocks at us.'' Based upon your own investigation, 
don't you think that as chief executive officer, Mr. Skilling 
himself knew how Enron was cooking the books?
    Mr. Powers. I think Mr. Skilling knew a great deal about 
these transactions and how losses were being hedged with 
Enron's own stock, yes.
    Mr. Deutsch. And in fact, Mr. Powers, doesn't your report 
state that Skilling, and I quoted from the report, ``had direct 
responsibility for ensuring that those reporting to him 
performed their oversight responsibilities properly and that 
Skilling did not appear to have given much attention to these 
duties.'' Are you saying that Mr. Skilling was inattentive and 
didn't understand his own company or--I mean is that the answer 
or is this again a case of fraud?
    Mr. Powers. Well, at a minimum, he wasn't attending to his 
own company. He claims in his interview that he knew very 
little about them. Causey and others say that he was very 
involved in them. And to answer that question, I think the 
proper investigators and authorities are going to have to 
ascertain what his state of mind was.
    Mr. Deutsch. Right. And the last question: Mr. Skilling was 
supposed to review and sign off on each of these deals, these 
are the partnerships. He didn't, but he allowed Mr. Causey to 
tell the board that everything was fine. As CEO and also 
president and chief operating officer, wasn't Mr. Skilling's 
primary obligations, again, I mean violated by that action?
    Mr. Powers. Yes. I don't think he performed his function.
    Mr. Deutsch. Thank you.
    Mr. Whitfield [presiding]. The gentleman's time has 
expired. At this time, we will call on the chairman of the 
entire committee, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. Dean Powers, the 
New York Times reports that Mr. Skilling may not have been 
aware of what was happening, but he was certainly, and this is 
a quote, ``in no mood to hear anybody question what went on at 
Enron.'' The quote is, ``In early April, when Enron reported 
its freshly scrubbed, and apparently falsified, first quarter 
profits, Mr. Skilling bristled when one questioner on the 
conference call tried to ask questions about the company's 
balance sheet. He used a vulgarity to describe the question, 
stunning many who were listening to the call.'' We produced 
documents indicating that when members in the corporation sent 
signatures sheets around to indicate approval of all these 
transactions that LJM1 and LJM2 were conducting, and everybody 
signed except one person. There is one signature missing--
Jeffrey Skilling's. Did you see those documents? Did you have 
any questions about why Mr. Skilling didn't sign those approval 
documents?
    Mr. Powers. Yes.
    Chairman Tauzin. What did you learn?
    Mr. Powers. He didn't explain it. He was at the board 
meeting, though, that voted on it.
    Chairman Tauzin. Yes. You do know that Jordan Mintz sent 
him a memo saying, here are all the documents. Please sign 
them.
    Mr. Powers. Yes.
    Chairman Tauzin. Did he explain why he didn't sign them? 
Three times I think he tried to call. Mintz was doing 
everything he could to get Mr. Skilling on the record as saying 
these deals were okay and everything was honkey-dory, and Mr. 
Skilling wouldn't sign them.
    Mr. Powers. Absolutely. I understand he should have signed 
them, it was his responsibility to sign them, and he didn't 
sign them.
    Chairman Tauzin. And we just don't know why.
    Mr. Powers. He didn't explain that to us.
    Chairman Tauzin. I will take you to page 95, because the 
question of corporate self-dealing and profiteering is a pretty 
interesting one. In the report you issued, on page 95, you talk 
about the--I think it is the South Hampton deal.
    Mr. Powers. Yes.
    Chairman Tauzin. In which a group called the Fastow Family 
Foundation, which was composed of people like Glisan. We just 
heard about Enron employee, Mr. Glisan, who later became 
treasurer of Enron.
    Mr. Powers. Right. It was the Family Foundation and Glisan.
    Chairman Tauzin. And also Mordaunt.
    Mr. Powers. And Mordaunt.
    Chairman Tauzin. And Mordaunt and Glisan were part of the 
Family Foundation, as well as separate investors, right?
    Mr. Powers. No, I don't think they were part of the Family 
Foundation.
    Chairman Tauzin. Well, let us go back to your report on 
page 93: ``The limited partners were the Fastow Family 
Foundation, signed by Fastow, the director, Glisan, 
Mordaunt''--you mean they were separate investors.
    Mr. Powers. Yes.
    Chairman Tauzin. They were not part of the foundation.
    Mr. Powers. We don't know who was in the Family Foundation.
    Chairman Tauzin. We don't know.
    Mr. Powers. Yes.
    Chairman Tauzin. But the Family Foundation puts up 25 
grand. Big Doe Foundation, whatever that is, puts up another 
bunch of money, and Glisan and Mordaunt, as well as some of the 
other Enron employees, including Yaeger Patel, I think, who was 
married--at the time some of the negotiations were going on, 
they were engaged, the two Patels. They later signed as 
marriage partners, and they were operating on different sides 
of the table. Talk about a sweetheart deal, that was really 
interesting.
    But these players, Glisan and Mordaunt, put up $5,800 each. 
Within 6 weeks, they each received $1 million, and they 
apparently told you they don't know--nobody explained to them 
why they got such a big return in 6 weeks, but they took the 
money. And you asked the question, ``The magnitude of these 
returns raises serious questions as to why Fastow and Kopper 
offered these investments to other employees.'' I think the 
answer comes in the next paragraph. You talk about what those 
other employees did. You have Glisan who has presented to the 
Raptor I transaction to the board. He was called the business 
unit originator and the person negotiating for Enron. He is the 
guy on the other side of the table, and Fastow says, ``Come on 
in and be an investor on this side of the table, and you make a 
million dollars as a result in 6 weeks.'' And you asked the 
question why they offered him this deal?
    You also asked the question why Mordaunt was involved? 
Well, we find out Mordaunt was a lawyer. She was involved in 
the initial Rhythm transaction, general counsel structured 
finance. She becomes later the general counsel of Enron 
Communications and later the Enron Broadband Services Board 
where all this broadband capacity was transferred out to one of 
these partnerships in an attempt to show a lot of profit that 
never existed. And you asked why they were interested in 
bringing her in and letting her earn a million dollars? Isn't 
the answer quite obvious?
    Mr. Powers. Well, let me say why we asked the question.
    Chairman Tauzin. Yes.
    Mr. Powers. We tried to be very careful in this report----
    Chairman Tauzin. I know.
    Mr. Powers. [continuing] not to draw surmises and 
conclusions, but certainly this is extremely suggestive as to 
why this happened. We understand that, and we tried to lay out 
the facts as best we could.
    Chairman Tauzin. And I alluded to it, and we are going to 
discuss it more on Thursday, but you, too, discovered, as we 
did, that in some cases, other than offering them a chance to 
invest, partnerships in some cases actually threatened 
employees with firings and losses of bonuses; is that correct?
    Mr. Whitfield. The gentleman's time is expired.
    Mr. Powers. We did find pressure, yes. The exact nature of 
it I would have to go back and check, but we did find pressure.
    Chairman Tauzin. I think we got some of your answers. Thank 
you.
    Mr. Whitfield. The gentleman from Michigan is recognized 
for 5 minutes.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy. I 
find at page 9 of your report this footnote which says this: 
``One member of the Special Investigative Committee, Mr. 
Herbert S. Winokur, Jr., was a member of the board of the 
directors and the Finance Committee during the relevant period. 
The portions of the report describing and evaluating the 
actions of its board and its committees are solely the views of 
the other two members of the committee, Dean William C. Powers, 
Jr., the University of Texas Law School, and Raymond S. 
Troubh.'' What does that mean, and why is that there, and what 
does it tell us?
    Mr. Powers. Well, when the committee was set up, in fact 
when it was originally set up, there were no new directors. I 
was brought in to Chair the committee and then Mr. Troubh was 
brought in to be on the committee. Other members were taken off 
the committee, and Mr. Winokur was left on the committee, so 
that there was a majority on the committee of outside, that is, 
new directors that didn't have any involvement in these 
transactions. We felt that Mr. Winokur was a very good source 
of information about the backgrounds of some of these 
transactions, and it was invaluable to have that information. 
When it came time to----
    Mr. Dingell. You could have gotten that from him under the 
cooperation you were promised from the company, could you not?
    Mr. Powers. Well, the interviews were for a period of time 
and couldn't go back, and there were lots of--especially early 
on, there was a great deal of information that we needed. When 
it came time to judging the board, we thought the report would 
speak more forcefully if Mr. Troubh and I made those judgments. 
That was a judgment we made as to how to best go forward with 
this investigation. And I think the report hopefully indicates 
we had an unvarnished position.
    Mr. Dingell. I don't criticize the report, but doesn't it 
indicate that Mr. Winokur was essentially participating in an 
investigation of himself?
    Mr. Powers. Well, it was an investigation of a number of 
things, and it did include himself. And when it came to 
judgments about the board Mr. Troubh and I had independent 
meetings of the committee with counsel and approved and decided 
what would go in the report about the board.
    Mr. Dingell. Thank you. Mr. Winokur told the board he was 
familiar with and recommended approval of a plan by Mr. 
Skilling and Mr. Fastow to sell 50 percent interest in JEDI, an 
affiliate of Enron and Chewco; isn't that correct?
    Mr. Powers. Yes.
    Mr. Dingell. The minutes record that Mr. Winokur states he 
was going to meet further with Mr. Fastow the next day, 
presumably on this matter since it was the only one on the 
agenda involving Mr. Fastow. Did that meeting occur?
    Mr. Powers. During his interview--we did interview Mr. 
Winokur; he didn't recall whether that meeting occurred.
    Mr. Dingell. Okay. According to the board's minutes, Mr. 
Fastow reviewed the economics of the project, the financing 
arrangements, the corporate structure of the acquiring company 
with the board. I presume this had previously been reviewed 
with the Finance Committee; is that correct?
    Mr. Powers. I believe so. Yes.
    Mr. Dingell. Now, Mr. Fastow told the board that Chewco was 
a special purpose vehicle not affiliated with the company or 
CalPERS, since the board was approving a bridge loan of $383 
million and a corporate guaranty of $250 million loan to 
Chewco, an unknown entity. Did Mr. Winokur or any board member 
ask who controlled Chewco?
    Mr. Powers. I would have to go back to the particular--that 
was the Executive Committee, it wasn't the Finance Committee, 
and we don't know whether they asked those questions.
    Mr. Dingell. Was due diligence done by the Enron board 
officers or counsel?
    Mr. Powers. I don't know if I am in a position to say 
whether the diligence was due. That is a very complicated legal 
question, and----
    Mr. Dingell. It should have----
    Mr. Powers [continuing] we tried to lay out what happened.
    Mr. Dingell. Due diligence should have been done on this 
matter, should it not?
    Mr. Powers. Due diligence should be done on all corporate 
matters.
    Mr. Dingell. Now, Chewco understood that it did not have 
the necessary--in your report, you state Enron employees 
involved in Chewco understood that it did not have the 
necessary 3 percent in outside equity required to stay off 
Enron's books. If the employees understood that, did Mr. 
Winokur and the Finance Committee also understand it?
    Mr. Powers. I think that when Chewco was originally set up, 
it was widely understood that it did not have the 3 percent 
equity.
    Mr. Dingell. Did it ever get the 3 percent equity?
    Mr. Powers. Well, then the idea was that it would be 
reconstituted or restructured to get the 3 percent equity.
    Mr. Dingell. Did it ever get the 3 percent----
    Mr. Powers. And then they attempted to but did not because 
of the guarantees that were given to the loans, to Big River 
and Little River.
    Mr. Dingell. Did Mr. Winokur or any other member of the 
Finance Committee ever ask who was providing the outside 
equity?
    Mr. Powers. I don't know.
    Mr. Whitfield. The gentleman's time is expired.
    Mr. Dingell. Mr. Chairman, I thank you. There are a lot of 
other fine questions here.
    Chairman Tauzin. Would the Chair--I ask unanimous consent 
that the gentleman have 30 seconds that could be yielded to me 
just to put a fact in the record.
    Mr. Dingell. I yield to my friend, if I get the time.
    Chairman Tauzin. I thank the Chair. I simply wanted to make 
sure I had in the record that in the South Hampton deal, the 
$25,000 investment in March by the Fastow Family Foundation 
paid back $4.5 million in May to that foundation.
    Mr. Powers. Yes, that is correct.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Whitfield. The gentleman from North Carolina is 
recognized for 5 minutes.
    Mr. Burr. Thank you for your patience and your willingness 
to go through all this. You have helped us to sort out a lot of 
things.
    Mr. Powers. Thank you, Congressman.
    Mr. Burr. I am going to try to clarify some things that we 
have already been over, so be patient with me. Did your 
committee interview Sherron Watkins?
    Mr. Powers. We asked to, but she wouldn't.
    Mr. Burr. She declined.
    Mr. Powers. Right, she declined.
    Mr. Burr. Do you or do the folks who are with you know the 
reason that she chose to decline?
    Mr. Powers. I don't know if she stated it. We communicated 
with her lawyer, and he said that she was going to be 
interviewed by a lot of other people and did not want to be 
interviewed by us, which I must say I don't fault her for.
    Mr. Burr. To your knowledge, or the knowledge of your 
committee, was Sherron Watkins interviewed in any way, shape or 
form by V&E when they carried out their investigation?
    Mr. Powers. Yes.
    Mr. Burr. And do we know the specifics of whether they 
agreed or disagreed with the claims that she had made in the 
letter to Mr. Lay?
    Mr. Powers. Well, they wrote a letter to Mr. Lay reporting 
on that.
    Mr. Burr. Were you----
    Mr. Powers. I am sorry, to Jim Derrick, who was the chief 
financial officer--who was the general counsel.
    Mr. Burr. Is it true that the lawyers for V&E were told not 
to review the underlying accounting for the partnerships or the 
very area that Ms. Watkins had raised questions about?
    Mr. Powers. That is what I understand from the letter. 
Again, I haven't looked into that carefully.
    Mr. Burr. So what would a law firm hired to investigate ask 
Ms. Watkins if her claims were about the underlying accounting 
procedures and the lawyers were told not to investigate that? 
What could you possibly glean from it if you can't ask her 
about the accusations that she made, or at least you were 
instructed not to?
    Mr. Powers. Right.
    Mr. Burr. Is that not your understanding, though, of what 
they were told?
    Mr. Powers. It is my understanding from what I have heard 
today. I did not focus on what Vincent and Elkins did.
    Mr. Burr. Let me go back to the special-purpose entities, 
if I could, and I think you agreed with Chairman Tauzin earlier 
that there was no economic purpose for the creation of the SPEs 
in their structure that they eventually ended up, am I correct?
    Mr. Powers. Well, the deals made with the Raptors are where 
we say there was--the hedges, there was no economic purpose. 
SPEs are very common in business, and there are legitimate 
reasons to use SPEs.
    Mr. Burr. And I realize that, and I think that it will 
become a very common word used in the next several months. But, 
specifically, the way these were designed, is it safe to say 
that the architect of these SPEs would have known it is not for 
economic purposes?
    Mr. Powers. Well, I would distinguish between Chewco and 
the Raptors.
    Mr. Burr. Okay.
    Mr. Powers. When we found out what the Raptors were about, 
it is apparent to us and our conclusion is they weren't for 
economic purposes. And so somebody who is knowledgeable in 
accounting that designed them, I would say they would know that 
these were for accounting rather than economic purposes. Chewco 
I think is different.
    Mr. Burr. In layman's terms, they were designed to hide 
debt, weren't they?
    Mr. Powers. Well, the Raptors were designed to offset 
losses and therefore show other earnings on the income 
statement and other than that didn't have an economic purpose.
    Mr. Burr. Is it safe to say that anybody that participated 
in the architecture of these SPEs would have known what the 
intent was of creating them?
    Mr. Powers. I would think that the architect, the people 
that put together the Raptors understood why they were being 
put together.
    Mr. Burr. Let me ask you if your committee looked at who 
participated in the compensation packages for Fastow and his 
involvement in the partnerships, Kopper or any other 
individual? I mean Fastow didn't create his own compensation 
package within the partnership, did he?
    Mr. Powers. I assume that was a negotiation with the 
limited partners in those partnerships, and we have not had 
access to those materials.
    Mr. Burr. I think alluded, at least in some of the SPEs 
that the board signed off on it, the Board of Enron.
    Mr. Powers. Well, the board signed off on the creation, and 
we are told that the LJM compensation to Fastow was LJM 
business, and they didn't look into it.
    Mr. Burr. And is that common practice for a board not to 
have interest or did the board not know of Enron's backdoor 
exposure?
    Mr. Powers. Well, I think there was interest on the board 
on Fastow's compensation. The thought was, the explanation was 
that it would be somehow inappropriate to pierce LJM, because 
they were supposed to be independent. We don't agree with that.
    Mr. Burr. Did you have any----
    Mr. Whitfield. The gentleman's time has expired.
    Mr. Burr. If I could finish this question, Mr. Chairman. 
Were you aware of whether Skilling knew of the compensation 
package?
    Mr. Powers. He says he--well, we don't know.
    Mr. Burr. Lay?
    Mr. Powers. He said he didn't know. Both knew that Fastow 
would be getting some return, but the magnitude of the 
compensation package Lay says to us he didn't know.
    Mr. Burr. And the board would be a no.
    Mr. Powers. The board did not know. The board says they 
didn't know.
    Mr. Burr. I would only say this, Mr. Chairman, in 
concluding: I find it unusual, and I hope you do, Dean Powers, 
that in this case the two CEOs and chairman of the board could 
have the structure of what was created here and, one, been 
ignorant of the structure and, two, been ignorant of the 
compensation package that went along with it, because, in 
essence, it was Enron's money. I thank you.
    Mr. Powers. Thank you.
    Mr. Whitfield. The gentleman from Michigan is recognized 
for 5 minutes.
    Mr. Stupak. Thank you, Mr. Chairman, and, Mr. Powers, 
thanks again for being here and being patient with all of our 
questions.
    Mr. Powers. Thank you.
    Mr. Stupak. You said earlier in some testimony that Mr. Lay 
did not understand that hedging with Enron stock was not okay 
and that accountants told him it was okay, therefore he went 
along with the accountants; is that right?
    Mr. Powers. I said that is what he said to us.
    Mr. Stupak. Okay. That is what he said to you. Did he say 
who the accountants were who told him it was okay? Would that 
be Mr. Causey?
    Mr. Powers. Certainly Mr. Causey, and I think Andersen.
    Mr. Stupak. Andersen Consulting, or the Andersen the firm.
    Mr. Powers. Yes, Arthur Andersen. I believe that is what he 
said in his interview.
    Mr. Stupak. Okay. Michael Kopper, who is he at Enron?
    Mr. Powers. He was in the Finance group, and I don't know 
exactly what his job was. He was not senior management.
    Mr. Stupak. Wasn't he a former vice president involved in 
these partnerships like Chewco and a couple others?
    Mr. Powers. Well, he was involved--he did have an interest 
in Chewco, yes, absolutely.
    Mr. Stupak. Okay. And that is the deal that went from 
$125,000 to, what, $10 million? Mr. Kopper took $125,000 
investment into Chewco, and it went to $10 million?
    Mr. Powers. Yes, that is correct.
    Mr. Stupak. How could that--I mean how is that conceivable? 
I mean how is that--is that even legal to--I mean the return on 
that is astronomical in a short period of time.
    Mr. Powers. That is an extremely abnormal rate of return.
    Mr. Stupak. How quickly did that turn around to $10 
million?
    Mr. Powers. A little more than 3 years.
    Mr. Stupak. Can you think of any legal way in which you 
could do that, take $125,000 and turn it into $10 million in 3 
years at Enron, in the partnerships----
    Mr. Powers. Not without taking on a tremendous amount of 
risk, and we don't see that he did take on risk.
    Mr. Stupak. They took no risk, because it was all backed up 
by Enron stock, right?
    Mr. Powers. Well, I can't say that he took no risk. These 
are very complex transactions. There were ways in which the 
investors could lose money. There were options on Enron stock, 
but little risk.
    Mr. Stupak. If it is a possibility, did any investor in any 
of these partnerships lose any money?
    Mr. Powers. Not that I am aware of.
    Mr. Stupak. Okay. Mr. Kopper also received up to $2 million 
in management fees relating to Chewco, and yet in your review, 
you were unable to identify, and I am going to quote now, ``how 
these payments were determined or what, if anything, Mr. Kopper 
did to justify these payments.''
    Mr. Powers. Yes.
    Mr. Stupak. How is it possible to have an employee make in 
excess of $2 million and no one knows what he did to earn it?
    Mr. Powers. Well, these were investment funds, and they 
were simply managing these investments, and the work would have 
been relatively simple back office work, and it was never 
explained to us why that would justify a $2 million fee.
    Mr. Stupak. This $2 million, whose money would that be?
    Mr. Powers. That would be----
    Mr. Stupak. It is relating to Chewco and----
    Mr. Powers. It is very complicated. It would have been paid 
out of JEDI----
    Mr. Stupak. Okay.
    Mr. Powers. [continuing] which was another one of these 
entities, not related parties, so we didn't probe into JEDI. It 
was paid out of JEDI, but ultimately that is coming out of the 
interest of Enron. So when you track it all back, Enron is 
effectively paying.
    Mr. Stupak. So when we go through this simplified Whitewing 
leveraging transaction, all those pyramids and circles and 
boxes and squares and parts of South America and all over this 
country, that is really--when it is all said and done, that is 
really Enron's money.
    Mr. Powers. Well, there are some outside investors in 
these, this 3 percent rule, et cetera, but Enron has very 
substantial interests in these entities.
    Mr. Stupak. And Enron is really the employees' 401(k) plan, 
their pension plan and the shareholders who invested in Enron. 
They are really the ones who really are left here--after we get 
done with all these nice pyramids and everything else, they are 
the guys who are left holding the empty promises.
    Mr. Powers. The employees and the shareholders and the 
people with their retirement nest eggs and the 401(k) plans are 
tragic and terrible victims of this.
    Mr. Stupak. So whether Kopper made $10 million over 3 years 
or $2 million for consulting on Chewco, it was those 
investors--the bottom line, it was really their money that 
got----
    Mr. Powers. They were the ones that got hurt.
    Mr. Whitfield. The gentleman's time has expired. The 
gentleman from Florida is recognized for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman. Dean Powers, you and 
I talked a little bit about Mr. Winokur and his 
responsibilities, as he is a board member. Now, I would like 
you to go to Rick Causey who was, I understand, the chief 
accounting officer, an officer of Enron himself, and then Rick 
Buy who, as I understand, his title was chief risk officer.
    Mr. Powers. Yes.
    Mr. Stearns. So now we are moving into the corporate 
officers, the people who worked, the employees of Enron, and I 
just want to go into a little bit about what their 
responsibilities were, and did you interview both these 
individuals?
    Mr. Powers. I didn't personally, but the committee, yes, it 
did interview those individuals.
    Mr. Stearns. And were they forthright with you?
    Mr. Powers. They certainly answered our questions.
    Mr. Stearns. Causey and Buy stated they participated in the 
LJM transaction reviews in a limited capacity.
    Mr. Powers. Yes, that is what they said.
    Mr. Stearns. And they said this is, I guess, that we on the 
committee are having a little trouble understanding. Buy stated 
that the Global Finance Group made the strategic decisions 
regarding the deals, and that his risk review had nothing to do 
with the big picture. Causey stated that his review of the 
transaction was to make sure that the accounting treatment was 
accurate, and he did not participate in the strategic 
decisions. So we have an idea what they feel. What do you think 
they did?
    Mr. Powers. I think they had very limited review of the 
transactions between Enron and LJM2, and that they were charged 
with the responsibility of having much more robust and 
substantial review.
    Mr. Stearns. So who charged them with this responsibility? 
Did the board of directors?
    Mr. Powers. The board, yes.
    Mr. Stearns. The board of directors, in your opinion, 
charged them with the responsibility to have a thorough 
understanding of these LJM transactions.
    Mr. Powers. And ensure that there were transactions that 
would be for the benefit of Enron.
    Mr. Stearns. Why didn't these two officers who were 
employees of the corporation and had the great title of chief 
accounting officer and chief risk officer, I mean I would think 
if you or I had those titles of risk and accounting, that we 
would not think, well, we are not really here to make sure 
these agreements are accurate. We don't participate in 
strategic decisions. If you are going to be in charge of risk, 
you have got to understand what the strategic decisions. So 
where do you think--am I missing something or as a dean do you 
think we are missing something? The board thought they had the 
responsibility and yet they are telling you they didn't have 
that responsibility or authority.
    Mr. Powers. Right. In my view, they didn't fulfill their 
responsibilities with respect to review of these transactions.
    Mr. Stearns. And why do you think that was?
    Mr. Powers. We don't know that for certain. I think they 
were unwilling to stand up to Andy Fastow.
    Mr. Stearns. And what about--do you think--you think that 
is it, that Fastow intimidated them that much; is that it?
    Mr. Powers. I don't know Fastow. I have talked to people 
around the company. He was a very aggressive person and was in 
charge. I don't know this to be the case. The most plausible 
explanation to me--we don't have any evidence that Causey or 
Buy participated. Something may come out later, but we didn't 
find any evidence of that.
    Mr. Stearns. Dean Powers, in all deference to you, it 
sounds like you are suspending disbelief here. I mean either 
they were intimidated by him or they are complicit in the 
operation.
    Mr. Powers. Well, I think they certainly understood how LJM 
wanted to and how the Raptors were working; certainly, Causey 
did. So complicit in that sense I agree with. We didn't find 
any events of financial participation, which does not mean 
that----
    Mr. Stearns. No, I understand.
    Mr. Powers. [continuing] we will come out. I think they 
were intimidated by Fastow.
    Mr. Stearns. That is what you think.
    Mr. Powers. Partly.
    Mr. Stearns. I am just curious why they didn't mention the 
problem, the accounting problem or the risk problem to the 
Audit and Compliance Committee and the Finance Committee.
    Mr. Powers. Because doing so would have brought down 
scrutiny on these deals that Fastow was participating in, and 
for whatever reason they didn't do that.
    Mr. Stearns. The board of directors was similarly not 
informed on March 2001 that Raptor deficit grew to 
approximately $500 million or that it would require a charge 
against Enron's earning in that quarter if not addressed prior 
to March 31, 2001. The board of directors was not informed that 
the Raptors SPEs were restructured on March 26, 2001 to avoid 
the anticipated charge to earnings. And the board was not 
informed about the transfer of approximately $800 million of 
Enron stock contracts that was part of the restructuring. 
Causey and Buy were aware of the deficit and restructuring. Why 
did they fail to mention them to the board? And you are saying 
they were totally intimidated. That is what you are 
conjecturing.
    Mr. Powers. They wanted to--I think at that point, at the 
point that you are describing with the restructuring, I think 
now they would have a motivation--I don't know what happened--
of not having come out all the structures that had been there 
before.
    Mr. Stearns. Dean Powers, my last question.
    Mr. Powers. Yes.
    Mr. Stearns. Did you ever ask him the same questions I am 
asking you? Why didn't they refer--based upon all this 
restructuring and all this loss and this $800 million of Enron 
stock contracts as part of the restructuring, did your group 
ever say to Mr. Causey and Mr. Buy, ``Hey, fellas, why didn't 
you tell the board of directors?''
    Mr. Powers. We did ask them that question----
    Mr. Stearns. And what was his answer?
    Mr. Powers. [continuing] and his answer, what he said was 
by the time of the next board meeting, they had fixed the 
problem; in fact, they had and it kept going on. But by the 
time of the next board meeting, they thought they fixed it, so 
they didn't mention it. I do not think----
    Mr. Stearns. Who said they fixed the problem?
    Mr. Whitfield. The gentleman's time has expired.
    Mr. Stearns. Okay. Thank you.
    Mr. Whitfield. The gentlelady from Colorado is recognized 
for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Powers, I assume 
you are familiar with the corporate governance guidelines of 
the Board of Directors of Enron, are you?
    Mr. Powers. Yes.
    Ms. DeGette. I was just looking over these a little while 
ago. Dr. Jaedicke, as I understand, is the chairman of the 
Audit and Compliance Committee, or was during the relevant 
time; is that right?
    Mr. Powers. Yes, and I believe still is.
    Ms. DeGette. Okay. And what these guidelines say is the 
Audit and Compliance Committee serves as the overseer of 
Enron's financial reporting process, system of internal 
controls and corporate compliance process, and it provides 
reasonable assurance that Enron conducts its business in 
conformance with appropriate legal and regulatory standards and 
requirements. Do you think that the Audit and Compliance 
Committee met those standards?
    Mr. Powers. If I could just preface it, that the committees 
of the board are entitled to rely on statements by management, 
unless they have reason to believe those statements by 
management are unreliable.
    Ms. DeGette. Well, yes, I understand, but----
    Mr. Powers. So whether they met that obligation I don't 
know. I don't think the board generally looked hard enough into 
these very complicated transactions, knowing of these conflicts 
of interest.
    Ms. DeGette. Well, and case in point, annually the Audit 
and Compliance Committee was given a deal approval sheet by 
which they were supposed to look at the related party 
transactions, right?
    Mr. Powers. Yes.
    Ms. DeGette. And that is the sheet we were talking about 
before where everybody signed it but Skilling, right?
    Mr. Powers. No.
    Ms. DeGette. No?
    Mr. Powers. There is an approval of LJM----
    Ms. DeGette. Right.
    Mr. Powers. [continuing] which Skilling was supposed to 
approve--was at the board, he did approve it, he just didn't 
sign off on the sheet.
    Ms. DeGette. Right, but he didn't sign it.
    Mr. Powers. Then there are the--once LJM was set up, there 
are the individual hedging deals between Enron.
    Ms. DeGette. Okay. Right, right. You are right, you are 
right. But did the Audit Committee review those?
    Mr. Powers. They had a meeting where Causey said, ``Here 
are the transactions,'' and they didn't do anything more than 
that.
    Ms. DeGette. They didn't do anything more than that.
    Mr. Powers. Correct.
    Ms. DeGette. That would seem to me, if I were one of the 
small investors who had all my 401(k) invested in this Enron 
stock, I would think that that would not provide me with 
reasonable assurance that these deals were being conducted in 
conformance with appropriate legal and regulatory standards and 
requirements. I don't know.
    Mr. Winokur was the chairman of the Finance Committee, 
which under the guidelines reviews and makes recommendations to 
the board and management on matters concerning both current and 
long-range financial strategy and planning, including, without 
limitation, budgets, dividends, equity offerings, debt and 
other financing, foreign exchange policy, investment policy and 
trading limits policy, correct?
    Mr. Powers. Yes, that is correct.
    Ms. DeGette. Now, in reviewing everything you have 
reviewed, do you think the Finance Committee fulfilled its 
obligation?
    Mr. Powers. Not knowing the details of the standards of 
securities law, I don't know the answer from a legal point of 
view.
    Ms. DeGette. Yes, but Mr. Powers, you know what happened 
here with these financial----
    Mr. Powers. I don't think they oversaw these transactions 
sufficiently.
    Ms. DeGette. Thank you. Now, do you have any idea what were 
the limits of the directors and liabilities insurance that the 
Enron Board had? That might be of interest to many of the board 
members.
    Mr. Powers. I think I do, but I would like to check.
    Ms. DeGette. Thank you.
    Mr. Powers. I am not absolutely sure. My understanding is 
it is $350 million.
    Ms. DeGette. Thank you. Now, quickly, I just want to talk 
about the South Hampton deal, because we had mentioned that 
before. And in your report, you talked about Ms. Mordaunt who 
is the lawyer--in-house lawyer for Enron, Kathy Lynn, who is an 
employee in the finance area, and Ann Yaeger Patel, who is also 
an employee at Enron Global Finance. You said that they 
appeared to have violated Enron's code of conduct by accepting 
interest in the South Hampton Place deal without the consent of 
Enron's chairman and CEO, correct?
    Mr. Powers. That is correct.
    Ms. DeGette. Can you talk for a minute about what the South 
Hampton deal was, briefly?
    Mr. Powers. When the Rhythms net was unwound, there was a 
partnership formed to take the distributions from that 
transaction, and this was a partnership formed to take in some 
of the distributions from that unwind.
    Ms. DeGette. Now----
    Mr. Whitfield. The gentlelady's time has expired.
    Chairman Tauzin. Mr. Chairman, could I ask unanimous 
consent the gentlelady have 2 additional minutes? I think she 
is on a good trail here.
    Mr. Whitfield. Without objection, the gentlelady has 2 
additional minutes.
    Ms. DeGette. Thank you very much, and thanks to the 
chairman of the full committee. Didn't some of these employees 
also work for LJM and get bonuses from that partnership?
    Mr. Powers. I believe so, yes.
    Ms. DeGette. And that is the partnership you just said a 
few minutes ago in which Mr. Fastow, in exchange for $25,000, 
got $4.5 million for his Family Foundation, right?
    Mr. Powers. That was the South Hampton partnership, yes.
    Ms. DeGette. Right, that is the one we are talking about 
right here.
    Mr. Powers. Yes, exactly.
    Ms. DeGette. Now, on page 16 of your report, you also say 
that two other employees who each invested $5,800 in the South 
Hampton deal each received a million dollars in the same time 
period, correct?
    Mr. Powers. Yes.
    Ms. DeGette. Who were those two employees, and how did they 
get those returns, if you have any idea?
    Mr. Powers. That was Yaeger--I am sorry, Glisan and 
Mordaunt.
    Ms. DeGette. Okay.
    Mr. Powers. Glisan and Mordaunt.
    Ms. DeGette. Now, Mordaunt is a lawyer who worked on some 
of these deals for Enron, correct?
    Mr. Powers. Yes.
    Ms. DeGette. And now when she talked to committee staff, it 
is my understanding that she never asked Mr. Kopper what the 
investment was, because it was such a small amount of money. 
Then 1 day Mr. Kopper said, ``Where do we wire the money,'' and 
then low and behold it was a million dollars. She didn't ask 
questions then either. Now, as an attorney for Enron, Mr. 
Powers, don't you think that Ms. Mordaunt had an ethical 
responsibility to know where the money was coming from and if 
it conflicted with her client's interests?
    Mr. Powers. Yes.
    Ms. DeGette. Thank you. No further questions.
    Chairman Tauzin. But would the gentlelady----
    Ms. DeGette. Oh, happy to yield.
    Chairman Tauzin. Before that, the gentlelady yield. Didn't 
Ann Yaeger, later Ann Yaeger Patel, contribute $2,900 and take 
about $500,000 back?
    Mr. Powers. Yes, that is my understanding.
    Chairman Tauzin. And didn't Kathy Lynn, another Enron 
employee, contribute $2,330 and take back about $500,000 as 
well?
    Mr. Powers. Yes.
    Chairman Tauzin. And they were in the same position as 
these two employees that the gentlelady just discussed; is that 
right?
    Mr. Powers. They weren't lawyers.
    Chairman Tauzin. They weren't lawyers, but they were 
employees of Enron----
    Mr. Powers. Absolutely.
    Chairman Tauzin. [continuing] in violation of the code of 
ethics, investing in a partner to whom Enron was dealing and 
taking out an extraordinary rate of return. Did you ask them if 
they ever questioned why they got so much money back?
    Mr. Powers. Yes. They declined to be interviewed.
    Chairman Tauzin. Who do they work for?
    Mr. Powers. They work for Enron.
    Chairman Tauzin. But for whom at Enron?
    Mr. Powers. They work for LJM now.
    Chairman Tauzin. Now, but who did they work for at the 
time?
    Mr. Powers. They worked for Enron in the Finance Group.
    Chairman Tauzin. In the Finance Department.
    Mr. Powers. Yes.
    Chairman Tauzin. And who was their immediate supervisor?
    Mr. Powers. I don't know who their immediate supervisor 
was. Fastow was----
    Chairman Tauzin. I am thinking it was Michael Kopper; is 
that correct?
    Mr. Powers. It may be, but I don't----
    Chairman Tauzin. I would like you to supplement that 
answer, if you can determine it, for the record.
    Mr. Powers. Okay.
    Chairman Tauzin. Thank the gentlelady.
    Mr. Whitfield. The gentleman's time has expired.
    Ms. DeGette. Reclaiming my time.
    Mr. Dingell. Could I ask unanimous consent the gentlelady 
have 1 additional minute?
    Mr. Whitfield. Is the gentleman asking that the chairman 
have an additional minute or the lady from Colorado?
    Mr. Dingell. The gentlewoman from Colorado.
    Mr. Whitfield. Without objection, the gentlelady from 
California is recognized for 1 additional minute.
    Ms. DeGette. Colorado, please.
    Mr. Whitfield. I mean Colorado. What did I say?
    Ms. DeGette. I yield to my friend from Michigan.
    Mr. Dingell. And I thank my dear friend. I have a 
curiosity. How many of these people have cooperated with you 
and been fully--of those mentioned, and have been fully 
forthcoming in terms of all of the events and the production of 
records?
    Mr. Powers. Of these people we are talking about? Mordaunt 
did talk with us, and I think Mordaunt, even before she talked 
with us, did go to talk to the general counsel of the company.
    Mr. Dingell. How about the others?
    Mr. Powers. The others have not cooperated with us.
    Mr. Dingell. Would you name then those who have not 
cooperated?
    Mr. Powers. I think Glisan, Yaeger, Patel----
    Ms. DeGette. Lynn?
    Mr. Powers. Yes, Lynn and of course Kopper has not either.
    Mr. Dingell. And I gather that Andersen has not permitted 
the committee to review all its working papers too; is that 
right?
    Mr. Powers. Well, yes. Andersen--we had long negotiations 
with Andersen. We have seen some of their papers, we haven't 
seen other papers. We never got to interview them. When Enron 
finally discharged them, they then said, ``We are not''--we had 
been discussing interviewing their employees and then they 
finally said no.
    Mr. Dingell. Did Andersen tell you why they are not 
cooperating with you?
    Mr. Powers. Well, they told us they weren't cooperating 
with us because Enron discharged them. That was what they said.
    Mr. Dingell. Do they not have a continuing fiduciary duty 
to their former client to discuss matters which went on between 
Andersen and Enron?
    Mr. Powers. To be honest, after discharge, whether they do 
or not, I don't know the answer to that question.
    Mr. Dingell. What does your logic tell you?
    Mr. Powers. I think they ought to cooperate fully with 
getting to the bottom of this. Legally, whether their fiduciary 
ends, I just don't know the answer to that.
    Mr. Whitfield. The gentleman's time has expired.
    Mr. Dingell. And I thank the gentlewoman; I thank the 
Chair.
    Mr. Whitfield. The Chair will now grant himself 5 minutes. 
Dean Powers, this relates to the Chewco transaction, and I 
think Mr. Greenwood touched on this, but on the issue of trying 
to meet the reserve account for the Barclay's Bank, in your 
report, you stated that others told us that those matters 
involving the $6 million side agreement and reserve accounts 
were known openly and discussed. Could you tell me who those 
others were, the names of those others?
    Mr. Powers. I am not sure we know, other than people said 
that it was being discussed. Of the people that told us, 
Shirley Hudler is one person.
    Mr. Whitfield. Shirley Hudler?
    Mr. Powers. Yes. I think there may have been other people 
that have told us that I don't recall now.
    Mr. Whitfield. Okay.
    Mr. Powers. There were also notes from meetings where this 
issue was discussed to some extent, and I don't know now 
whether there is an indication of who was at those meetings or 
if there was, who they were.
    Mr. Whitfield. We would ask that you supply those notes. 
Can you do that?
    Mr. Powers. The same thing. It is not my property to 
dispose of, but we will certainly address that to Enron.
    Mr. Whitfield. Okay. You will talk to Enron.
    Mr. Powers. And we will support that request.
    Mr. Whitfield. Okay. Now, let me ask you this: Do you think 
that the transfer by Mr. Kopper of his ownership interest in 
Chewco's limited partner to his domestic partner, William 
Dodson, resolved the accounting and disclosure issues, as 
Enron, Andersen and Vincent & Elkins apparently all did?
    Mr. Powers. I am not sure we know whether he was his 
domestic partner at the time, which would be relevant to this. 
Kopper and Dodson didn't talk with us. If it was his domestic 
partner at the time, that certainly raises an issue of whether 
Kopper still had control.
    Chairman Tauzin. Would the chairman yield?
    Mr. Whitfield. Yes.
    Chairman Tauzin. My understanding is our investigators have 
determined that they were. I believe that they were.
    Mr. Powers. Yes. I am not saying they weren't. That was a 
fact that we were unable to track down.
    Chairman Tauzin. Thank you.
    Mr. Whitfield. Did you find any evidence that despite this 
transfer of ownership interest that Mr. Dodson actually 
exercised any control over the limited partners or exercised 
control?
    Mr. Powers. I don't think we know what Mr. Dodson did.
    Mr. Whitfield. So you don't have any evidence on that. Now, 
on page 61 of your report, you discussed the buyout of Chewco 
by Enron, in which Enron paid Chewco Kopper $10 million. Did 
you find any evidence of improper influence by Fastow or others 
on Kopper's behalf in that transaction?
    Mr. Powers. Yes. Fastow is the one that negotiated with 
Kopper on this deal.
    Mr. Whitfield. So he was negotiating with the person that 
reported to him at Enron?
    Mr. Powers. Yes.
    Mr. Whitfield. Okay. And what did Mr. McMahon tell you 
about his involvement in this transaction and the conversations 
he had with others about it, including Mr. Fastow?
    Mr. Powers. I believe he knew about these negotiations and 
had complained that $10 million was too much.
    Mr. Whitfield. Did he indicate what he would consider to be 
the appropriate price?
    Mr. Powers. My recollection is about a million dollars, 
but----
    Mr. Whitfield. A million dollars.
    Mr. Powers. About a million dollars.
    Mr. Whitfield. So he was aware of that then, okay. You have 
already indicated that your conversations with Fastow were 
quite short, and that is correct, right?
    Mr. Powers. It took about an hour, but there is very little 
information.
    Mr. Whitfield. Did he tell you about his involvement in 
this deal at all? Did he talk about his involvement in that 
transaction?
    Mr. Powers. He gave--sorry.
    Mr. Whitfield. On page 61, footnote 17, it indicates that, 
``Fastow told us that he had not participated in these 
negotiations.''
    Mr. Powers. Right. And then we had a document that 
demonstrated that wasn't true, and at that point he stopped 
talking to us, or meaningfully talking to us.
    Mr. Whitfield. And what was that document?
    Mr. Powers. It was a document that demonstrated he had 
participated in these negotiations.
    Mr. Whitfield. And you have that document.
    Mr. Powers. Yes.
    Mr. Whitfield. Okay. And we would also like to have that, 
and if you would talk to Enron about that and----
    Mr. Powers. Okay.
    Mr. Whitfield. [continuing] support us in our efforts.
    Mr. Powers. And I will say we will support providing 
whatever information and backup of this information the 
committee needs.
    Mr. Whitfield. And we appreciate that very much. The 
Special Committee's report states how facetious earnings from 
the Raptors accounted for more than 80 percent of Enron's 
earnings from the last two quarters of the year 2000. Even if 
no one knew about the problems lurking with the Raptors at that 
time, wouldn't the very fact that 80 percent of earnings are 
coming from transactions with a partnership headed by Enron's 
CFO have been enough to send off alarms in the investor and 
analyst communities?
    Mr. Powers. Yes. I think it was a little over 70 percent, 
but, yes, I would think that would be something that would have 
set off concerns in the investor community.
    Mr. Whitfield. Okay. And what was Enron's Board of 
Directors' understanding regarding the Enron/LJM2 services 
agreement?
    Mr. Powers. The board members that we talked to said they 
understood--well, some said they didn't know about that. Those 
who did said they assumed it was a very minor services 
agreement for back office booking of transactions, and that it 
was not significant.
    Mr. Whitfield. And did the members of the board of 
directors understand that Enron's own employees were 
negotiating on behalf of LJM2 against Enron?
    Mr. Powers. Yes. They understood that Fastow was 
representing LJM1 and LJM2.
    Mr. Whitfield. Any others, other than Fastow, that they 
understood?
    Mr. Powers. They say that they didn't know that other Enron 
employees were then over on the services agreement working for 
Fastow and negotiating on the basis of LJM.
    Mr. Whitfield. But the entire board was aware of Fastow's 
involvement.
    Mr. Powers. Yes, yes.
    Mr. Whitfield. Okay. All right. That is the end of my 
questions. I recognize the gentleman from Illinois for 5 
minutes.
    Mr. Rush. Thank you, Mr. Chairman. Mr. Powers, I want to 
get back to this question of bona fide economic objectives. And 
in your estimation, how common is it for corporations to misuse 
SPEs merely to accomplish favorable financial results and not 
achieve bona fide economic objectives or risks--or transferring 
risk? And is this abuse specific to certain industries? And I 
also would like for you just to give us some examples of what 
you would call a bona fide economic objective or transfer of 
risk.
    Mr. Powers. Okay. In answer to the first part of your 
question, I don't know how widely used, how they are used by 
other companies, and I hope and I am quite sure other companies 
are looking into how they are using.
    I think there are two different kinds of transactions here. 
One is a hedging transaction, and there is nothing 
inappropriate about a hedging transaction to take risk from a 
company. We all do it, in a sense, when we buy insurance, as 
long as you are really buying insurance, rather than just 
setting up something to look like a hedging transaction that 
isn't accomplishing that purpose. That is the first issue.
    The second are these SPEs to, as we say, put debt off the 
books, and I would just give two examples. If I buy 100 shares 
of Ford Motor Company, I risk the value of my equity but not 
all the balance sheet of the Ford Motor Company when I 
consolidate it into my financial statements, and that seems 
appropriate. If I own almost--you know, if I own all of the 
Ford Motor Company, maybe it should be different. When I lease 
equipment rather than buy equipment, one of the considerations 
I may take into account is I don't want to have the debt on the 
equipment on my balance sheet. So these are extremely difficult 
policy questions for the accounting industry, for Congress, for 
the Securities and Exchange Commission to sort out how these 
ought to be used. But I do think it would be unfair to come 
away with the Enron experience thinking that all hedges or all 
special-purpose vehicles are inappropriate. They are not; they 
are often and I desperately hope by most people in the country 
used in appropriate ways.
    Mr. Rush. With that in mind, I know you are not a 
securities expert--you have testified about that on more than 
one occasion this afternoon--but do you have an opinion or 
opinions in terms of how we, as Members of Congress, can avoid 
the abuses of SPEs that were perpetuated by Enron without doing 
away with what you have clearly defined as the more legitimate 
purposes and benefits of SPEs?
    Mr. Powers. Well, I look at it, from a non-securities 
expert, as a fairly simply issue: There ought to be 
transparency. To the extent that the problem here is that the 
existing laws might have been enforced, then enforcement. To 
the extent that the existing laws aren't requiring enough 
transparency, then maybe the existing laws need to be changed. 
But transparency is absolutely crucial, and that was one of the 
problems here.
    Mr. Rush. I want to try to get quickly back to the question 
of Mr. Richard Buy here, who is the Enron senior risk officer. 
In staff interviews with Mr. Buy, he suggested, similar to the 
findings of your report, that his group was not charged with 
the responsibility of evaluating Enron's big picture risk as it 
related to all of these activities in total. What then is the 
role of someone who is the risk management officer, the risk 
manager, is it just to look at a risk change here or a risk 
change there or a willy nilly look at this or do they have to 
be more focused and more concerted in their efforts?
    Mr. Powers. As I indicated at the outset of my testimony, 
Enron isn't just a pipeline and energy trading company; it has 
a very significant investment portfolio. And a primary, if not 
only, job of the risk assessment group was to evaluate the 
risks of those investments, diversification, what doing due 
diligence on the investments and things like that. I am not an 
expert on this, but as an investment manager, that was one of 
the roles.
    Mr. Rush. Mr. Chairman, one additional question here. 
According to your report, the board of directors also charged 
Mr. Buy with a substantial role in the oversight of Enron's 
relationship with the LJM partnerships, and he was supposed to 
review and sign off every deal. Why then was Mr. Buy not in a 
position to see the multitude of problems and conflicts facing 
these partnerships and Enron? Do you any thoughts on that?
    Mr. Powers. Well, I think he was in a position to see that 
these were not arms-length deals.
    Mr. Rush. So you say he was in a position.
    Mr. Powers. He might not have been in a position to see the 
complexities of the underlying transactions, but he was in a 
position to monitor the arms-length nature of many of these 
deals.
    Mr. Rush. Thank you, Mr. Chairman. I yield back.
    Mr. Whitfield. The gentleman's time has expired. The 
gentleman from Texas is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. First, Mr. Powers, I 
appreciate you spending all this time with the subcommittee 
this afternoon. I may be the last questioner, but let me ask 
you some questions about Arthur Andersen accounting firm. In 
your report, it stated that, ``Evidence available to us,'' and 
I am quoting, ``suggests that Andersen did not fulfill its 
professional responsibilities in connection with its audits and 
Enron's financial statements or its obligations to bring to the 
attention of Enron's Board concerns about Enron's internal 
controls.'' What specifically should Andersen have been doing 
that it was not doing?
    Mr. Powers. Well, we have, throughout the morning and 
afternoon, talked about many, many things in the accounting, 
including the overall structure of hedging with one's own stock 
that were, we think inappropriate, but at a minimum very 
questionable. And in their audit should have brought those to 
the attention of the Audit Committee.
    Mr. Green. Since Arthur Andersen earned $5.7 million in 
consulting fees to set up the LJM deals, how could they not 
have known about the outside equity was bogus?
    Mr. Powers. Well, they may have known that, but the source 
of the money to back the Big River and Little River loans was 
from Barclay's, and the only reason it wasn't equity was it was 
backed with a reserve account that came from a distribution 
from JEDI in a very complicated way, and I must say, it is not 
possible, even in a thorough audit, to see every little 
movement of money. Again, I am not an accountant who goes 
through these audits. I would not be surprised by that claim 
that we didn't know that. I don't know whether it is true or 
not. And I don't think--in the report, we have not stated 
otherwise. We don't know whether Andersen was aware that the 
Big River and Little River loans in Chewco were backed by 
reserve accounts, which made them not equity but debt.
    Mr. Green. You also mentioned that Andersen participated in 
the structuring and accounting treatment of the Raptor 
transactions and charged again over a million dollars for its 
services, yet it apparently failed to provide the oversight to 
prevent those transactions from going forward. Was Andersen 
purely--and I hate to say this about such a great company I 
thought of so many years, their partnership--was it purely 
incompetent in its duties or simply taking advantage of a 
company that appears to be out of control? In other words, was 
Andersen there as a whistleblower or to earn fees?
    Mr. Powers. Well, I don't know why Andersen did not 
recognize these issues. What we do say is that as the Raptors, 
for example, were being developed, Andersen was providing 
accounting services of some sort, whether we call them 
consulting, or real-time accounting. They were providing real-
time accounting as those were being developed, and they did not 
bring to the attention of the board--they did not bring 
independent judgment to bear on those transactions. If they 
did, they didn't do it adequately.
    Mr. Green. I guess it is frustrating being from Houston and 
seeing the tragedy and the devastation from Enron and the 
collapse, and I guess--and I have read lots of articles--I 
guess Enron could be the Michael Milken in a tall, shiny 
skyscraper in downtown Houston. And it is just such a shock to 
watching a company over 15 or 16 years grow and be so 
successful and aggressive but aggressive to the point where 
they created these multiple partnerships. It is just 
astonishing, I guess.
    Mr. Powers. Well, Congressman, being not too far up the 
road from Houston and being in Houston quite a bit----
    Mr. Green. Hundred and sixty-two miles; I have driven it 
lots of times.
    Mr. Powers. [continuing] this is a terrible tragedy for 
Houston and our part of the country. Yes, there is a lot of 
technical material we have talked about today, but I think you 
are absolutely right to bring that point that this is a great 
human tragedy for many individuals.
    Mr. Whitfield. The gentleman's time has expired.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Whitfield. I understand the chairman of the entire 
committee seeks recognition?
    Chairman Tauzin. I seek recognition with the consent of the 
members to do something on behalf of our investigation, 
collectively, and ask the gentleman a few more questions, if 
you don't mind. Would the gentleman yield?
    Mr. Whitfield. Without objection.
    Chairman Tauzin. On behalf of our investigation, Dean 
Powers, has the alleged shredding of documents at Enron impeded 
the investigation of your committee in any way?
    Mr. Powers. I don't think so. We haven't seen some hole 
that, ``Where is that?'' Having said that--and we haven't had 
the opportunity to go through a lot of documents. We haven't 
been able to download a lot of e-mail. So there is a great deal 
of material.
    Chairman Tauzin. Do you admit going in that you had limited 
access to documents?
    Mr. Powers. Correct.
    Chairman Tauzin. Are you aware of why shredding is 
occurring at Enron as late as January and what is being 
shredded? Why did they hire a company called Shredco to come in 
and do all this shredding?
    Mr. Powers. I don't know. I can't answer that.
    Chairman Tauzin. Well, you have not asked that question in 
the purview of your investigation? Didn't it disturb you that 
all this shredding is going on while you are trying to do this 
investigation for the board?
    Mr. Powers. Well, I mean I read about it in the paper, and 
we did ask, are there areas of documents that we are not 
getting, are there transactions that we can't understand? And 
we came to the conclusion that we were trying to move ahead 
expeditiously, that there were not gaps in our----
    Chairman Tauzin. Did you ask the question, why is all this 
shredding going on?
    Mr. Powers. We did talk to the FBI about that and 
cooperated with the FBI and----
    Chairman Tauzin. This is going on while the FBI is there in 
Houston?
    Mr. Powers. No, no. They came in after the----
    Chairman Tauzin. After the shredding?
    Mr. Powers. [continuing] after the shredding had started.
    Chairman Tauzin. Just to put in this perspective, my 
understanding from the investigators, Mr. Dingell, is that the 
web site of the shredding company, Shredco, opens up with a 
statement, ``You think you got rid of it, now you are being 
sued. Call us, we guarantee destruction.'' And Enron would hire 
a company with that as their invite to come in and shred 
documents in the middle of all this. Doesn't that disturb you?
    Mr. Powers. Well, I agree these allegations of shredding 
are extremely serious allegations that the FBI ought to look 
into.
    Chairman Tauzin. And to put this in perspective, because 
you had limited access to documents anyhow, you can't know 
whether documents were being shredded that may have aided and 
assisted you in understanding the intricacies and the 
involvement of parties in these affairs.
    Mr. Powers. Right. We can't know whether some of those 
documents would have helped us or whether even if they had not 
been shredded we would have gotten them.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Whitfield. Dean, I know you will be disappointed, but 
that probably concludes the hearing. And on behalf of the 
committee, I want to thank you so much for being here today and 
testifying. Your report of the Special Investigative Committee 
has been particularly helpful to us as we continue our efforts 
to get to the bottom of this and to determine what we can do 
from preventing this in the future. So thank you very much for 
joining us.
    Mr. Powers. Thank you.
    [Whereupon, at 2:45 p.m., the subcommittee was adjourned.]

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